Wall Street’s Management of Risk: Why It Failed

Abstract

A little-discussed aspect of the 2007–2008 global financial crisis has been the failure of risk management systems in a variety of large financial companies. Preceding this global crisis an extraordinary amount of money was spent on ‘risk management’ and an equally extraordinary amount of verbiage was said to shareholders and regulators about management’s focus on risks. As formal risk management systems are largely a creation of the last two decades, institutions did not have the benefit of the foresight they could provide prior to previous crashes. In addition, since 2008, two risk management system failures produced a massive bankruptcy in the case of MFGlobal and an embarrassing large loss for JPMorgan Chase’s previously successful risk management system.