Roger Ehrenberg has a great post today, “Straight-talk on FAS 157: Blackstone and their Banker Buddies Have it Wrong,” which I suggest you all read.
Although I was taken with the entire discussion, the last paragraph caught my attention:
So why do risk managers and bank managements’ so consistently make bad decisions? Probably because there is an over-reliance on measures that are seemingly quantifiable. They can measure delta. They can measure vega. They can measure theta. They can measure gamma (or at least they think they can). They can estimate credit loss ratios. But what about liquidity? When you are quantifying factor exposures, how exactly do you model liquidity as other risk factors change? It is a very, very hard question. Sometimes risk management requires judgment beyond computers, which is hopefully one of the biggest take-aways from the current credit melt-down. My sense is that there is currently a fear to manage without a machine telling you what to do. It is kind of like the drunk looking for his lost keys by the streetlight, simply because this is where he can see. But the likelihood of his keys being within the illumination of the streetlight is very, very low. Some of the best risk managers, guys like Gus Levy of Goldman Sachs and Ace Greenberg of Bear Stearns, didn’t rely on computers but relied on instinct, savvy and experience. We need more of this. It’s called leadership. Let’s not cloud the issue. It’s not about FAS 157 or any other accounting rule. It has been and always will be about management.
If that viewpoint resonates with you, you might enjoy a longer-form treatment in Across the Board (Conference Board) article, “Management’s Great Addiction.”