Managing Enterprise Risk in a Failing Economy: Is It Time to Rethink Risk Management?

by Robert N. Charette

Many economists believe that the risks present in the current economic downturn have the potential to repeat the Depression years of the 1930s. Governments across the globe are struggling to stabilize their individual economies from the financial contagion that started with subprime mortgages and spread all the way to the corporate and consumer credit markets. As governments commit trillions of dollars in coordinated risk mitigation efforts to try to prevent a total global economic meltdown, ironically, fingers are also pointing at risk (mis)management as a major cause of the current economic crisis. Poor risk management models have been blamed, at least in part, for the problems at Lehman Brothers, Bear Stearns, and UBS -- which in the first two cases led to their demise. Investor Warren Buffet recently summed up the skepticism about complicated quantitative risk management models, noting: "All I can say is, beware of geeks ... bearing formulas."

In this issue of Cutter IT Journal, we debate the role of risk management in the current economic crisis. Hear from one author who pins the economic collapse not on flawed risk management models, but on the lack of moral fiber in executive suites and boardrooms. Learn how the "predictable irrationality" of human beings is to blame for the waxing and waning of enterprise risk management efforts -- and what you can to do stabilize risk management practice in your organization. And discover the three enterprise risk management gaps you must close to help your organization withstand risks and ultimately improve the creation -- and protection -- of shareholder value.