Corporate & Securities Law

THESE ARE NOT THE RISKS YOU'RE LOOKING FOR... 

By Brett Sherman, The Sherman Law Firm

RISK MANAGEMENT the financial services industry is part art, part science.  But there is one axiom all organizations must accept before they can exercise true risk management:  Competent risk managers must expect that which you cannot imigine.     

YOU CANNOT PREDICT THE OUTCOME OF AN EVENT THAT HAS NOT YET OCCURRED.   THE FUTURE - EVEN THE IMMEDIATE FUTURE - IS A PRODUCT OF THE INTERLAY OF INFINITE VARIABLES (like weather, timing, your mood, whether or not you accellerate through a yellow light or step on the breaks, sunspots, the length of the line at Starbucks, sleeping on a decision or making a snap judgment, whether just catch your train to work or narrowly miss it and so on and so on).

Similar actions can and do produce vastly different reactions.  No amount of risk management can account for every contingency. But effective risk management must account for the fact that unexpected events will happen, and those unexpected events will produce unexpected outcomes.  Some of those unexpected outcomes will will be negative.  Losses come with the territory. Crippling losses do not. 

The only certainty regarding future events is that the future is uncertain.  Effective financial services risk management requires a belief that shocks and panics will happen.  Banks must be prepared to circle the wagons and withstand a crisis at all times.   

In sum, risk management's most important function is to fortify a firm's balance sheet so it is strong enough to withstand severe shocks that arise with little or no warning.  The CEO of JP Morgan Chase, is a promoter of this idea.  Jamie Dimon likes to say his company has a Fortress Balance Sheet. 

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If there is one thing you remember about the ongoing financial crisis, let it be this: NO COMPANY EVER HAS TOO MUCH CAPITAL.