Monday, 26 January 2009

Risk above the parapet

In the blog " Tomorrow is another day" on January21st the point was made as to how difficult it is to change a flawed business model when it is delivering good returns. In the January 24th-30th 2009 edition of the Economist, in its special report on the future of finance there is the following scenario set forth by Andrew Lo, professor at MIT Sloan School of Management :-

"Imagine a confrontation in 2004 between the head of Lehman and its chief risk officer. Foreseeing a catastrophe ahead the risk officer proposes shutting down the mortgage business, but his boss threatens to sack him on the spot. He suggests cutting back, but his boss counters that his competitors are expanding and his best people would be poached. He mentions hedging the risk, but his boss retorts that in the next two years that will cost hundreds of millions of dollars in lost profits."

The Economist goes on to point out that the risk officer's analysis would be hard for all but partnerships and private companies. Perhaps that is where the best risk management will come from in future.

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