ERM Symposium Closes With Focus on Big Picture

Financial risk management ninjas at the 2010 ERM Symposium consider "mega-ERM" steps to reduce the danger of systematic risk and of future financial-system crises.

By B.G. YOVOVICH, who has written for national trade publications for more than 20 years

CHICAGO---MIT professor Simon Johnson raised the dreaded S word at the 2010 Enterprise Risk Management Symposium held on April 13-14 in Chicago.

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Co-author (with fellow economist James Kwak) of recently published, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," Johnson spearheaded the end-of-conference discussions at the 8th annual event. He outlined his book's detailed analysis of the factors that drove the global economy to the brink of collapse--and his recommendations for ways to reduce the risk of a repeat.

"We need to develop a consensus about financial risk," Johnson told the risk professionals in the audience. "Over the next decade, we need everyone in this room--as well as your colleagues and your friends and families--to change their minds about what is safe and what is dangerous and what is reasonable and what is not reasonable around financial activities ... and systemic risk."

"This does not mean that we should not take risks. We want people to take risks, but we want the people who take risks to be able to fail ... without bringing down the system," emphasized Johnson, who argued that it is important to take risk management steps that will break up financial institutions that threaten the system because they have become "too big to fail."

The national-level, financial ERM debate continued when Johnson joined other symposium presenters in an end-of-conference panel.

"At what point does big become too big?" asked Howard Rosen, senior director at ratings agency Standard and Poor's. "You want to get larger because you want to diversify. Or because you want scale. Or because you have power in the market. At some point, becoming larger and diversifying your risk--which were the things that we told people were good things to do--become a bad thing. ... We now have to look for a metric that can tell us when big and effective becomes too big and ineffective."

Robert M. Mark, founding CEO of Pleasant Hill, Calif.-based risk management technology and service provider Black Diamond Risk, countered, arguing that size is not a measure of risk.

"I would argue that size is too narrow a dimension ... we need multiple dimensions," he said, suggesting that perhaps the U.S. government could use a chief risk officer at the cabinet level.

An audience member then queried whether a limit on the size of American banks would provide other countries with a competitive advantage over the United States.

"We have to make a decision: Do we, in the United States, with our history and our attitudes and our economy, do we wait for other people to get this or do we do it ourselves," Johnson answered.

He illustrated his position with a different type of hypothetical risk situation: Say that the Chinese decide to subsidize some risk, yet cheap way of generating electricity through nuclear reactors.

"Should we react to that by saying, 'We should have some really risky nuclear power plants in the United States?' I do not think so," Johnson told the audience. "We would say, 'That's a really bad idea. Let's stay a long way from that technology, and let's talk the Chinese out of that for their own good.' "

April 20, 2010

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