The “holodecks” of the post-Captain Kirk “Star Trek” universe--high-tech pleasure centers that create the illusion of doing just about anything you wish without risk of harm--sound a lot like the imaginary world in which insurers and investors, in blissful ignorance, traded credit default swaps on worthless securities backed by reckless subprime mortgages without fear of any nasty consequences.
How could so many supposedly brilliant financial minds have been so clueless about the massive exposures they were assuming?
Again, the holodeck analogy helps explain such insane market misbehavior. In "Star Trek," holodecks come equipped with a safety mechanism to keep people from getting hurt. For example, you could climb an imaginary mountain, yet if you slip and fall, the program simply lowers you gently back to the ground.
However, for those addicted to real danger, the safety protocols could be disabled, leaving you at risk of being seriously—even critically—injured. Similarly, AIG and other top financial firms shut off the safety protocols—better known as enterprise risk management--as they blindly entered this virtual reality of high-risk investments.
Is anyone prepared to argue at this point that any organization can afford to maintain a silo mentality, abandon due diligence and ignore systemic exposures? Or that we don’t need someone—whether you call that individual a chief risk officer or enterprise risk manager—to be the responsible adult at the wild investment parties where supposedly savvy investors were bamboozled by returns that were too good to be true?
You can’t help but wonder, for example, whether a CRO or ERM might have been able to sound the alarm at AIG’s Financial Products unit. Might a CRO or ERM also have been more sensitive to the reputational risks of hosting lavish retreats for top producers right after begging for tens of billions in bailout funds from the government?
Indeed, had the most basic enterprise risk management principles not been tossed out the window at many of our most prominent financial services firms, perhaps we might have avoided the meltdown that has left our once proud economy in a shambles.
The Risk and Insurance Management Society is in a perfect position to make the case for ERM, and their initial steps in that direction are encouraging. The group has issued reports on how the lack of ERM undermined the integrity of corporate balance sheets and strategic planning, and that valuable message has been projected via RIMS webinars, white papers and press releases.
RIMS is poised to go even further. The group can help members make the case to senior management and company boards about the need for ERM—and for risk managers to become CROs to monitor system-wide risk.
Providing an ERM implementation kit—complete with talking points, boilerplate PowerPoint presentations and easily adaptable action plans—would arm risk managers with the arguments and tools they need to get the concept adopted at their organizations, and place them at the helm of ERM efforts.
Had ERM been the rule rather than the exception in Corporate America last year, imagine how much better off our economy would be today.
We can no longer afford to get caught up in the fantasy world of a financial holodeck. We need enterprise risk managers to force us to confront the harsh realities of the real investment world.
Only then may our economy live long and prosper. (Sorry, couldn't help myself.)
What do you folks think?
