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Corporate Value of Enterprise Risk Management: The Next Step in Business Management by Sim Segal

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Chapter 9

Financial Crisis Case Study

I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.

Abraham Lincoln

The global financial crisis that began in the United States in 2007 is a complex and challenging case study. In the United States, this has been described as the most damaging economic event since the Great Depression, which followed the stock market crash of 1929. Economists still debate the facts of the 1929 crash—the relative importance of the events that caused it, the interacting factors that deepened it, and the effectiveness of the government actions to mitigate it. Certainly, the financial crisis, from which we still have not recovered at the time of the writing of this book, will be similarly debated for decades.

We will not claim to present here a definitive, or even nearly complete, discussion of this event. However, what we will do is analyze the financial crisis from an ERM perspective. During 2008, the first full year of the financial crisis, many in the ERM field were being asked the following question:

Banks have been claiming primacy in risk management for a long time. ERM is the latest incarnation of risk management, so banks must have been doing ERM, right? Yet the banks just blew up the entire global economy. So, if ERM didn't prevent this financial crisis, how can ERM be any good?

This chapter is in response to this question. We will examine whether ...

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