Subprime risk management lessons

The Subprime Risk Management FailuresThe subprime crisis represented a colossal risk management failure formany organizationsAs of Oct ’08, $670bn+ credit losses since ‘07; $1-1.5tn potential industry lossesCommonly cited systemic reasons include excess leverage, illiquidity, contagionFailure of credit rating agencies, and too much reliance on ratingsFailures in risk measurement and monitoring, concentration analysis, stress testingMajor organizational and cultural issuesWas the U.S. Subprime incident a “Black Swan,” an unforecastableextreme tail event?In fact, many analysts (including RiskMetrics CFRA) gave early warnings about the US housingbubble burst, and a number of firms positioned themselves to profit from this riskRobert Shiller: “There was a failure to communicate and a failure to put all thisinformation together and act on it in a systematic way” Source: Portfolio.com, “WorldAccording to Robert Shiller,” by Lloyd Grovewww.riskmetrics.com 2