Author: Thomas H. Stanton
The book deals with the what and how of the mortgage bond crisis of about 2008. Only roughly because none of the organizations involved were not informed in advance. The book contains a great deal of historical material from the crisis, expressed in financial terms. A financial background helps to fully appreciate the book. Nevertheless, in the last chapter, the author takes up the challenge of extending the analogy with a number of non-financial organizations.
But what should we remember from this book?
First of all there are four principles of winners during crises:
1 ° Provide discipline and a long-term perspective.
2 ° Provide robust communication- and information systems
3 ° Provide the capacity to respond effectively to ‘early warning signs’ and
4 ° Ensure a constructive dialogue between the business units and the risk managers.
But there is more than that.
What are the differences between the firms that controlled the crisis and those who failed?
- The winners nor the losers saw that the houses would decrease in value. But the “survivors” saw that the market moved in a way that they did not understand. Therefore, they reduced exposure to it.
- The winners did research in 2006-2007 on the causes of the unexpected developments in the market.
- JP Morgan differed from other organizations because they built up a financial reserve to take over other organizations if they would get into trouble because of the developments in the market.
- Other companies failed because they took excessive risks at the wrong time in a narrow range of assets.
- Successful organizations received a lot of feedback and engaged in constructive dialogues before taking on risks.
- In some organizations, the CEO was actively involved in the decision to reduce the risk.
- Successful organizations had a culture, supported by top management, that promoted constant communication between business units and the risk team and higher up the hierarchy.
- When the successful organizations came into close contact, they again emphasized effective risk management.
- Successful organizations had information systems that provided an organization-wide view on risks and their changes in time.
- Perhaps the biggest problem is the immense pressure to deliver short-term performance. This prevents the installation of a risk management system.
- Effective risk management requires expenditure and discipline, in order not to take short-term gain, which other organizations do, based on risky practices. Support from the CEO and preferably also from ‘the board’ is essential.
- Risk management is part of all management. A strong information infrastructure is required both for managing the organization and for having an organization-wide view of the risks.
- Make sure that risk management does not become a formality!
- It is not easy to be a risk manager if the organization decides not to take the risks into account. You must always be able to tell your truth. Even if you are fired for it.
- Although the markets and the risks become more complex, simple questions remain critical in order to guarantee a good decision. An important question with weird markets is “what is happening that we do not understand?”.
- Winners discuss intense implications of threats.
- Winners had drawn up models for the risk situations, but did not trust them blindly.