Managing Risk and Performance: A Guide for Government Decision Makers

Chapter 12

Risk Management and Decision Making: Lessons from the Financial Crisis for Federal Managers¹

Thomas H. Stanton

Fellow, Center for Advanced Governmental Studies, Johns Hopkins University

The United States has experienced the most significant failure of its financial system since the Great Depression. The government of the United States committed over $3 trillion in spending, loan purchases, loans, and loan guarantees through the Treasury, the Federal Reserve System, and Federal Deposit Insurance Corporation (FDIC) to support financial institutions and auto companies, among other purposes, and enacted a $787 billion economic stimulus package. The unemployment rate doubled and perhaps 10 million homes will be lost to foreclosure.

This chapter seeks to continue the process of learning lessons from this expensive debacle. Among the most important of these relate to risk management as an integral part of sound decision making. Many large financial institutions, including Fannie Mae, Freddie Mac, Countrywide, IndyMac, Washington Mutual, AIG, Citigroup, Merrill Lynch, Wachovia, Lehman Brothers, and Bear Stearns, failed, in the sense that they went out of business, required massive amounts of government aid to stay afloat, or entered into mergers to end their existence as independent companies. Yet other large firms, including JPMorgan Chase, Goldman Sachs, Wells Fargo, and Toronto Dominion Bank, weathered the crisis and often emerged stronger than before.

Differences in risk ...