Rick Bookstaber makes
a good point today. Across Wall Street, heads of fixed income have been
losing their jobs in the wake of trading losses. Now these men had a job: to
take on risk in the fixed-income markets. When those markets went screwy in
July and August, risk became loss. But if you tell someone to take on risk,
then it’s a bit mean to hold that person responsible for doing just that. On
the other hand, what has happened to the people who were meant to be overseeing
that risk – the chief risk officers?
In the CRO job 99% of the days there is nothing going wrong. The only test
you get of how well you are doing – short of pouring out risk reports
and looking ponderous and prudent in meetings – is what happens to the
firm during times of market crisis. Every few years something calamitous happens
in the market; if the firm gets blown away, that suggests you did not do a
very good job.
But how much power do most banks’ CROs actually have? I suspect that most of
them spend a lot of time measuring risk, but find it much harder, in practice,
to actually mitigate risk, especially when the CEO is determined to "keep
dancing".