The Dow Jones industrial average was down over 5 percent the week that Congress marched toward what appeared to be no solution they could agree on. Then came a compromise, referred to by one congressman as a "sugar-coated Satan sandwich."The subsequent investor reaction to the S&P downgrade caused a near 10 percent market correction that mitigated to something much less. The real driver for the market reaction was more the inability of legislators to get along and put the country's interests before their own. I suspect few believed there wouldn't be an "agreement" in the end. But that's not my focus here; it is the effect of rating agency performance on opinion and the risk profile of entities, yes even that of the United States.
The risk profile of the United States is arguably not much different today than it was six, 12 or even 24 months ago. I would characterize that profile as beingfar beyond its risk-bearing capacity and well down the road of financial slavery, so much so that we now fret daily over who will continue to fund our debt-based, maniacally consumer-driven culture. So far, however, even as our long-term liabilities outstrip revenues by more than $150 trillion--an ostensibly irresolvable gap short of draconian sacrifice--we act like ostriches and ignore the realities of these facts and bury our heads in the sand, hoping the problem will go away.
At least one rating agency isn't playing along anymore (the other two big rating agencies continue the charade).
A VIEW WITH MERIT
While I am not one to put one source of opinion on risk management effectiveness on the pedestal, there is reason to believe that S&P's view has merit and that its ultimate view of risk, at least as it relates to the risk-bearing capacity of this great country, is worth a hearing. I have little doubt this market reaction will blow over, but S&P has had the courage to call us out as a country and question the wisdom of our current approach to risk management. How will we ultimately respond? Well, here's one example:
The SEC has just opened an inquiry on insider-trading possibilities within S&P that, if proven, could lead to losing its license to rate. A better response would be for the United States to begin applying some of the more common, and yes, S&P-endorsed techniques for understanding risk appetite and risk-bearing capacity. Needless to say, our great country wouldn't pass muster on many tests of these measures and would likely fail miserably.
No one entity or framework is the "answer" to managing risk effectively, but there are many great sources of learning that can get you closer to greatness. Are you open to these inputs or are you burying your head hoping for the best, thinking you're better than you are, playing a political game of shadow boxing and window dressing? Or are you a player, one that sees managing risk with excellence as the best way to produce the best performance outcomes? Think carefully before you answer.
CHRIS MANDEL is the president of Excellence in Risk Management LLC, a long-time risk management leader, and a former president of RIMS.
September 15, 2011
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