Financial Risk Management: A Practitioner's Guide to Managing Market and Credit Risk, 2nd Edition

CHAPTER 1

Introduction

1.1 LESSONS FROM A CRISIS

I began the first edition of this book with a reference to an episode of the television series Seinfeld in which the character George Costanza gets an assignment from his boss to read a book titled Risk Management and then give a report on this topic to other business executives. Costanza finds the book and topic so boring that his only solution is to convince someone else to read it for him and prepare notes. Clearly, my concern at the time was to write about financial risk management in a way that would keep readers from finding the subject dull. I could hardly have imagined then that eight years later Demi Moore would be playing the part of the head of an investment bank's risk management department in a widely released movie, Margin Call. Even less could I have imagined the terrible events that placed financial risk management in such a harsh spotlight.

My concern now is that the global financial crisis of 2007–2008 may have led to the conclusion that risk management is an exciting subject whose practitioners and practices cannot be trusted. I have thoroughly reviewed the material I presented in the first edition, and it still seems to me that if the principles I presented, principles that represented industry best practices, had been followed consistently, a disaster of the magnitude we experienced would not have been possible. In particular, the points I made in the first edition about using stress tests in addition to value ...