Book Review – Too Big To Fail

Andrew Ross Sorkin’s recent book, Too Big To Fail gives a dramatic account of the intense moments of the peak of the financial crisis around September 2008, and the unprecedented government actions taken in response. It is an engaging, fast paced first draft of history, as the author states “this book isn’t so much about the theoretical as it is about real people, the reality behind the scenes”. It is a very entertaining book for anyone with an interest in finance or politics, though those seeking deep theoretical discussions of topics like moral hazard will be disappointed.

It is striking how risk management was apparently neglected by Lehman which entered bankruptcy, whereas JP Morgan, who emerged from the crisis in a far stronger position, took risk management more seriously.

For Lehman, the approach to risk appears cavalier at best:

  • “While the firm [Lehman] did employ a well-regarded chief risk officer…her input was virtually nil…she was often asked to leave the room when issues concerning risk came up at executive committee meetings.”
  • “Though he was not by nature…a risk manager, Gregory played a pivotal role … in {Lehman’s] increasingly aggressive bets.”
  • “Walsh seemed immune to risk…They gave Walsh free rein and he used it to ram through deals [for Lehman].”

Conversely, for JP Morgan, risk management had far more credibility

  • “Barry Zubrow [chief risk officer], a relative newcomer to JP Morgan was quickly becoming one of its key executives.”
  • And a meeting  “Wieseneck [Lehman’s head of capital markets] was particularly worried about the imbalance of people from JP Morgan’s risk department, compared to the deal-making bankers he had expected.”

Though anecdotal, the correlation between effective risk management and successfully navigating the financial crisis seems clear. As always, the value of risk management only becomes clear after the event, but this is another reminder of the importance of the discipline.

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