"Commentary"-Risk Management
Thursday, February 07, 2008SUSIE GHARIB: Tonight's commentator has listened to all the chatter about risk in the credit markets these days. He says something's missing from the discussion. Here's Tom Stewart, editor of the "Harvard Business Review."
TOM STEWART, EDITOR, HARVARD BUSINESS REVIEW: The World Economic Forum in Davos the week before last was full of talk about risk. How couldn't it be, after months when supposedly safe financial instruments turned out to be full of nasty surprises, like the old snake in a can practical joke, only these weren't funny. And coming also in a week when markets plunged and the Fed jumped, when we learned there been another snake in a can, the actions of Societe General to undo trades by an allegedly rogue employee and that wasn't funny either.
No wonder all Davos was talking about risk, global frameworks and transparency. Jamie Dimon, the CEO of JPMorgan, brought the issue down to earth. He said, there's a management issue. Companies need to grow, but in a risk business, he said, the easiest way to grow is to leverage up. Now, all growth entails risk and often leverage in the form of debt. But financial companies -- risk companies -- have the special temptation to leverage up five- and 10-fold and to do it fast, something that's true of no other kind of business except start-ups.
No wonder they're regulated, then. And perhaps recently we've lost sight of the basis of sound regulation. As Robert Shiller, the Yale economist, told me, the best regulatory bodies, like the SEC and the FDIC have their roots in protecting consumers. That's been missing in the talk about what went wrong in sub-prime lending. An attitude of consumer protection, for mortgage borrowers and the buyers of mortgage securities, might have saved us from some nasty surprises. I'm Tom Stewart.
