Subprime – Do We Have a Problem Managing Risk ?

Due to the ongoing subprime fiasco many banks and financial institutions are in the process of redefining how they assess risk. As an investor I find it hard to believe that these major financial players could have miscalculated risk to the degree that it now has some of them teetering on bankruptcy while potentially throwing the U.S into a recession. Personally, I’m hoping that they knew the risk and were just greedy. As an investor the greed argument is much more reassuring than the notion that almost all of the major financial players in the U.S do not have the ability to accurately assess risk, and therefore were investing in products that they didn’t understand.

Recently Citigroup Chairman Win Bischoff was quoted as saying “managing risk within a bank is not just a matter of relying on internal processes but also requires taking the right decisions at the top of the company”. Is this new? Is he proposing a new standard for risk management? His quote leaves me asking “what were they doing before?”

This might be my naivety but I had assumed that since the bread and butter of financial institutions is assessing risk that the top brass was already committed to “taking the right decisions at the top of the company”. I was under the impression that the huge pay checks distributed to those at “the top of the company” were because they were able to assess risk and make decisions. Just to put this into perspective, recently ousted CEO Chuck Prince is leaving the company with $94 million in vested stock in addition to the $53.1 million he made over the last 4 years. While former of Merrill Lynch CEO Stanley O’Neal is being pushed out for a paltry $161.5 million. With salaries approaching the hundred million mark I’d say yes Mr. Bischoff perhaps....“managing risk within a bank is not just a matter of relying on internal processes but also requires taking the right decisions at the top of the company”.