Watch your Own Wallet
Polling the people who work at the New York banks that were at the center of the financial crisis, people were asked which of the following statements that they agreed with the most:
- We did it and we need to do something differently.
- They did it and they need to do something differently.
- Space Aliens did it and we hope that they do not do it again.
The poll results are in and the findings are:
- No one answered that they agreed with 1.
- The innocent all were able to answer that they agreed with 2.
- Those who were directly involved in the problems that led to the crisis all answered 3.
So the conclusion that you should reach from this survey is that nothing will be different in the future. The financial system will be run mostly the same as it had been run.
Your only protection is to WATCH YOUR OWN WALLET. That is, pay attention yourselves to things that might turn into the next set of systemic risks. Those things will all tend to be very large systematic risks.
So you need to use the emerging risks type process on the largest systematic risks. You need to assess periodically whether your firm’s exposures to these risks might in a crash result in firm ending losses. (Or you can prepare your application for a bailout – good luck on that).
Then you need to have a heart to heart discussion with your board. Stories of the firms that did the worst in the crisis tell that their boards urged them to take more and more risk.
Risk managers need to know whether it is their board’s wishes to be dancing up until the band sinks below the water or to stop perhaps a few songs before and leave the ship ahead of the crash.
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