CFO’s article on risk management brought up a fascinating point about how the Federal Reserve policies contributed to poor risk management in banks during the subprime mess. CFO makes a shaky link to Alan Greenspan’s role. Banks had been shedding, instead of managing, risk for years by passing it on to investors. They claim that Greenspan “praised” this dispersion of risk since it in fact bolstered the “safety and soundness” of the industry.
I think it did and that Greenspan was right. An important point in my thinking is that the banks that failed did NOT manage risk on the risk …read more

“Risk was not integrated but split between a credit risk officer and a market risk officer, both of whom reported to the CFO, who then reported to the CEO. That may work at a place like Goldman, where decisions are made collectively among executives. But at a firm with a strong-willed CEO, like Merrill, it can backfire. People close to Merrill say that even if Edwards [CFO] saw the risk, contradicting then-CEO Stan O’Neal was a dangerous game.”
This quote from the CFO magazine article on risk management on failing (Goldman) and successful (Merrill) banks, reveals a problem with many high …read more

CFO magazine covered how poor risk-management techniques, and more importantly, organizational culture and structure, contributed to the subprime problems:
“the inability to properly manage risk, and the failure of stress tests have so far resulted in global bank losses of $265 billion. With a few notable exceptions, bank CFOs seemed willfully ignorant of snowballing risk.”
The worst performers, like Merrill Lynch and Citigroup, shared common problems of a siloed approach to risk and insufficient communication among executive levels in finance, risk and operations. The best performers so far, represented by firms such as Goldman Sachs and Lehman Brothers, give risk a high …read more