Strategy and Risk Management

Appendix B

What Happened in 2007?

One day after a session was over and people were leaving, Justin invited me to dinner.

I knew he had something serious on his mind. Justin does things on his own schedule and time, so I was not surprised that during dinner he regaled me with funny stories about his adventures in New Mexico and his childhood dreams of being a cowboy. As we waited for the dishes to be cleared, Justin turned serious. “I now understand risk management thanks to you. Something has been weighing on my mind, though, and it has nothing to do with PJI. As an expert can you tell me what happened to the U.S. banking system? I know that we were on the edge of the cliff and thankfully recovered somewhat. Was it a failure of risk management?”

I responded, “In my opinion the answer is Yes’ and ‘No.’”

Poor Risk Management Did Not Foster the Great Recession

The reason I say “No” is because what happened in the United States and abroad was a failure of many different systems. An event that wasn’t supposed to happen did happen. True to Murphy’s law, when one institution, such as the mortgage lending system, failed, it triggered a failure of another system, and that triggered the failure of another. Soon it became like a line of dominos in which one fallen domino triggers the next domino and so on.

I refer to this economic meltdown as the Great Recession, a term made popular by media pundits. According to the “experts,” this sort of fiscal collapse was not supposed to happen, yet ...