This week's BusinessWeek reports on changes in risk management within financial institutions in the wake of the subprime meltdown and Societe Generale rogue trader fiasco. Merrill's new CEO, John Thaine, has created two new high-level risk manager positions reporting directly to him—and he is going to meet with them weekly. Morgan Stanley has appointed a new chief risk officer, Thomas Daula, reporting to the chief financial officer. Citigroup's latest CEO, Vikram Pandit, promises to be a "hands-on participant" in risk management. Is this the best BusinessWeek could come up with? That's sad. Pandit's "hands-on" pronouncement is nice, but it is what pretty much every CEO in the world has been saying for the past ten years. So what if there is some senior staff turnover at Morgan Stanley? It is not as if they didn't have a chief risk officer before Daula took the post. As for Thaine and his two new senior risk managers, it sounds like new titles for existing market and credit risk management functions. Forgive me for being honest, but it is a trait of any good risk manager. Financial risk management is a failure. Since the "risk management revolution" of the mid 1990s, we have experienced the 2001 stock market bubble, Enron, MCI-Worldcom, numerous other accounting scandals, the mutual fund timing farce, various hedge fund implosions, the sub-prime meltdown and now the Societe Generale fiasco. What is needed to cure risk management's ills is fundamental structural changes, not window dressing for reporters. There are striking parallels between the sorry state of risk management today and that of the accounting profession a hundred years ago. Back then, there were no firm rules. Accounting was whatever the CEO wanted it to be, and reporting was optional. Most companies reported sporadically. Others simply didn't report. JP Morgan was actually a pioneer of accounting, requiring his companies to release annual reports to shareholders based on fairly uniform standards. Are there any JP Morgans in our profession today? The BusinessWeek article goes on to exclaim that risk management salaries are up, with the most senior risk managers now taking home annual compensation in the $4 million to $5 million range. I want to vomit. Bloated executive compensation is one of the biggest corporate abuses today. A sound system of risk management would address this blight, not participate in it. A hundred years ago, paying accountants outlandish compensation would have done nothing to address the structural problems facing that profession. Today, doing so for risk managers will do nothing for ours. I have written about some of the structural changes that need to take place in our profession, and I will write about others. For now, I would like to turn this over to you the readers. What do you feel ails our profession? More importantly, what solutions do you recommend? If you have ideas, I encourage you to post them here as comments. Glyn A. Holton
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