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LEH and Four Lines of Defense in Risk Mangement


Ben Protess and Susanne Craig, NYT, Inside the End of tthe U.S. Bid to Punish Lehman Executives, here. Investigate Mr. Canellos?

But Mary L. Schapiro, the S.E.C. chairwoman, disagreed. She pushed George S. Canellos, who supervised the Lehman investigation as head of the S.E.C.’s New York office, to explain how executives who presided over the biggest bankruptcy in United States history could escape without a single civil charge.

“I don’t get it,” she said during a tense exchange with Mr. Canellos in her private conference room in Washington, according to the officials, who were not authorized to speak publicly. “Why is there no case?” she continued, staring at Mr. Canellos, instructing him to continue investigating whether Lehman misled investors. “The world won’t understand.”

She was right. Five years after Lehman’s collapse hastened a worldwide economic panic, the government faces lingering questions about the decision to spare executives like Richard S. Fuld Jr., who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government’s deadline for filing most charges will expire this month, the anniversary of Lehman’s collapse, providing a reminder of the case and its unpopular outcome.

Brad DeLong, Roger Ferguson: Financial System Stability, here. Dunno looks like Status Quo: 2, Change We Can Believe In: 0 for those of you scoring at home. QB for Change We Can Believe In inexplicably just took a safety in the End Zone. Line of scrimmage was at the 20 yard line. Pretty sure you’re close to knowing: it isn’t a bug, it’s a feature. Plan accordingly.

A question I did not get to ask Roger Ferguson:

You call for four lines of defense in risk management:

  • Regulators who demand adequate capital and proper marking-to-market
  • Boards that demand management focus on risk-management
  • Management that takes a long-term view and looks beyond the next crisis
  • Management that promotes a culture of trust, honesty, and open reporting

But we have always been calling for these four lines of defense since the days of Berle and Means, if not before, and it always fails.

So why not, instead of calling once more for better multi-level corporate governance as far as risk management is concerned, simply declare defeat, and turn instead to requiring very tight caps on leverage with instant liquidation for a company that breaches them?


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