Red-Blooded Risk: The Secret History of Wall Street

Why Risk Managers Failed to Prevent the Financial Crisis

Why didn't all of these techniques prevent the financial crisis? I think I'm in as good a position as anyone to answer that question. Middle-office risk managers speak to each other a lot, and the couple of years before the crisis were particularly open, because we were all struggling with the same regulatory changes. We all wanted to know how the others did things, so we could negotiate a generally acceptable standard with regulators. Also, I've been in the financial risk business since the beginning, and am active in various formal and informal middle-office risk manager organizations. Finally, I worked in commercial banks, investment banks, and hedge funds during the period, so I have a wider group of contacts and experience than most risk managers.

My first comment is some firms took this stuff very seriously and did good jobs. All of them survived. Other firms took things less seriously, and some firms ignored the professional consensus completely, except for regulatory-minimum facades. Some of those firms failed. However, among the firms that did less-than-great jobs, the total slackers did no worse in general than the average achievers. The reason is there are lots of levels of risk management. A firm might have great front-office risk management bred in the bone and strong financial control over things that matter, without having any respect for anyone with a risk management title. That's not as good as a great modern ...