There are a number of worthwhile accounts of the firms that failed or nearly failed in the great financial market collapse of 2007-2009. Too Big to Fail by Andrew Ross Sorkin and All the Devils Are Here by Bethany Maclean and Joseph Nocera are two strong general accounts. House of Cards by William D. Cohan tells the Bear Stearns story very well, and Fatal Risk by Roddy Doyle does the same for AIG.
But the stories they tell are mainly about the personalities of the men who led those companies and the blunders they made in strategy and funding. None of them focus closely on risk management. So to correct that, we thought we’d start building a timeline of major risk management mistakes made in the run-up to the crisis.
It’s not comprehensive. It’s just a series of anecdotes drawn from books, press coverage, government reports, and other sources. Please help us build it up by contributing more stories. We’ll add them to the timeline as you do.
Sometime in 2005
Stan O’Neal, CEO at Merrill Lynch, puts Ahmass Fakahany, his Chief Administrative Officer, in charge of risk. Over the next two years, Fakahany dismantles Merrill’s risk organization, firing senior managers and moving the remaining risk managers off the trading floor. Merrill’s exposure to the mortgage market grows to $55 billion, and the company is forced to merge into Bank of America in 2008.
Citigroup demotes Richard Bowen, a senior risk manager for raising the alarm over the decline in underwriting standards in its mortgage business. His report reaches Vice-Chairman Robert Rubin, but Rubin fails to act on it. The next year, Citigroup takes over $20 billion in mortgage loan losses.
The Market Risk Committee at UBS warns of the high concentration of risk in the firm’s CDO warehouse program, which at its peak reached $50 billion. Management ignores the warning, and UBS takes $40 billion losses on its CDO portfolio in 2007 and 2008.
Joseph Cassano, head of AIG Financial Products, refuses to give Joseph St. Denis, an internal auditor, information on potential collateral calls on Financial Product’s $420 billion portfolio of credit default swaps on mortgage backed securities. St. Denis leaves the firm, but Cassano stays. Just over a year later, when collateral calls peak at $80 billion, AIG is rescued from bankruptcy by a government bailout.
Lehman Brothers removes Madelyn Antoncic, its well-regarded Chief Risk Officer, from the Executive Committee, clearing the way for the company’s disastrous Archstone-Smith acquisition in October. That drives Lehman’s commercial real estate exposures to $40 billion just as the market peaks. To avoid write-downs, Lehman tries to spin off its real estate portfolio. But that only highlights the company’s weakness, and Lehman fails in September 2008.
Oliver Wyman issues an internal report criticizing Bear Stearns’ risk management for being a low priority. CEO Alan Schwartz says the report doesn’t indicate any substantial deficiencies. Within two weeks Bear Stearns’ funding evaporates, and the firm is forced to merge into JP Morgan.