Risk Averseness

It was 2pm, September 15, 2008. From the 40^th floor of my office, I looked at 745, Seventh Avenue, New York. People were coming out of this building, much earlier than in any other usual weekday, with small cartons, with files and folders and their last memorabilia of what was a rising career at Lehman Brothers. Walking out in their high-street Italian suits, they looked unmistakeably gloomy with their future in uncertainty. Lehman Brothers had filed for bankruptcy under Chapter 11 bankruptcy protection. The filing marked the largest bankruptcy in U.S. history with $613 billion dollars of debt. A few months back, it posted its first loss since being spun off by American Express which was in 1994. This event, formally kick-started the financial crisis that swept through global financial markets in 2008. Actually the roots of this risk emanated from the subprime mortgage and had begun spreading over a year ago.

Three days later on September 18, 2008. I was working at global headquarters of my then client, Morgan Stanley. Just after bankruptcy of Lehman Brothers, the focus of almost all the employees was on the Morgan Stanley’s plummeting share prices. The stock price, normally floating in $40s, reached a nadir - below $1. Everyone was keeping his fingers crossed and expecting the announcement of the fall of another investment-behemoth. At this crucial juncture, John Mack, the then CEO of Morgan Stanley, announced a strategic alliance with Japan’s largest financial group, Mitsubishi UFJ which bolstered former’s capital and equity positions. Morgan Stanley survived the financial storm.

History bears countless evidences that big companies have followed the path of oblivion when unable to manage their risks. For instance in this case, many financial companies failed to manage the risks created by the housing market downturn and subsequent sub-prime mortgage crisis which took heavy toll. Poor risk management led to fall of Lehman Brothers, Wachovia, WorldCom, Enron, Bear Stearns, Daewoo and the list goes on. On the contrary, many companies have successfully erected the mammoth corporates and turned it into successful firms during crisis by managing the risks efficiently. Corporate giants like FedEx, P&G, Hewlett Packard, TESCO, GE, General Motors and IBM came into existence during economic turbulence. Thus, risks may pinch the business severely but when managed well can prove to be a gold-mine of opportunity. In other words, the risks can be turned into opportunities if dealt proficiently.

    “Progress always involves risks. You can’t steal second base and keep your foot on first.”

                                                                                                                                                    – Frederick Wilcox

The concept of the risk is inherent to our human condition since the dawn of recorded history. Not only are there more risk situations today, but modern technological development has brought a heightened awareness of risk - both of those risks that we knew about in the past, and the emerging, new risks that are associated with the march of progress. A key element in this heightened awareness is the fact that we now know a great deal more about the physical world than we did in the 19th and much of the 20th century. The world has always been faced with “risk” – but unlike earlier, risks can now reach magnitudes of damage that hadn’t been imagined in earlier times. These and other harmful events may have put policy makers and the public "on the alert", but being aware is not the same thing as being equipped to prevent those risks or mitigate the damage they cause. Addressing risks in a changing environment requires a much broader perspective than those adopted in the past, and that requirement applies even to our very understanding of risk. These days, risk assessment needs to combine knowledge from a wider variety of disciplines and areas of expertise and pay increased attention to changing conditions within the driving forces mentioned above. Never the less the current business climate remains marred by a sense of fragility and vulnerability. Emerging risks are increasingly introducing volatility into companies’ earnings.