TOPICS
TOPICS
Managing Risk
Many of the financial firms that saw their foundations crack during the past two years had extensive risk management programs in place. Using a variety of processes developed by risk management professionals, the firms identified problems that could threaten their business plans. They had procedures to ensure those risks were factored into the decisions of top executives.
In 2007, a video that was posted on FederalERM.com, a Web site for enterprise risk management professionals in government, showed one executive explaining his firm's rigorous risk management process. He sounded impressive, but it turns out the executive was from Freddie Mac, the government-sponsored enterprise that made very risky financial decisions that led to the worst crisis in its existence in 2008. Obviously, something was wrong with a process that failed to identify and prevent a giant management catastrophe.
Now that the feds have started a variety of programs to reverse the economic meltdown caused by Freddie Mac and other financial firms' imprudent decisions, the government's risk managers get to see if they can do a better job than their private sector counterparts.
Government risk management professionals will hold their second national conference later this year. They also gather at FederalERM.com to discuss ways to prevent public sector risks from becoming public sector catastrophes. And they are contemplating forming an association. "All agencies manage some level of risk, but usually the traditional approach is to carry out the process in silos and within specific functional areas and not across the entire organization," says Karen Hardy, a federal enterprise risk management analyst. ERM brings "all those risk management activities within an organization under one umbrella, cutting across silos and managed within a strategic setting," she says.
Financial firms tended to follow a dot-the-i and cross-the-t approach to risk management. They complied with financial control requirements in the federal 2002 Sarbanes-Oxley Act, set up committees and shuffled papers purporting that risk was indeed being managed.
The federal government doesn't fall under Sarbanes-Oxley, but agencies do follow Office of Management and Budget Circular A-123 to demonstrate the internal controls they maintain to reduce financial risks.
But that kind of compliance-based model did not prevent major failure in the private sector, so it won't avert management disasters in the government. Instead, federal risk professionals are trying to develop management models that identify all sorts of systemic threats to their agencies' missions.
The Troubled Asset Relief Program and the economic stimulus program will be major tests of agencies' ability to identify and manage risk. Both involve massive amounts of money that must be spent quickly. Lots of money and not much time are ingredients for waste, fraud and mismanagement. Most of this money is being doled out to private firms, state and local governments, contractors and other third parties. Federal managers could quickly lose control as the money moves further away from them. Risk management professionals in government are just now formally organizing, but they're already facing a giant test.
Brian Friel covered management and human resources at Government Executive for six years and is now a National Journal staff correspondent.
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COMMENTS
- Government do better at risk management than the markets? Well, that wasn't bad as the joke of the day! Government failed the instant it bailed out the first bank. Bailing out Fannie and Freddie didn't help any either. Bankruptcy, while it would cause some disruption in the markets, was far and away the best option for not only the banks, but the auto companies and government corporations as well. Instead, government intervention has introduced uncertainty in the capital markets and threatens to destroy our capital structure. Maybe it already has. Lenders are going to have to demand very stiff risk premiums before they loan a cent to any marginal company like GM, Ford or Chrysler. Thanks, Uncle Sam, for rewarding bad management, wasting vast sums of precious tax dollars, screwing secured creditors and prolonging the agony of companies that are doomed to fail over the long run! Master of Business Administration Posted June 9, 2009 8:05 AM
- There are no clean hands here. The financial community dreamed up all kinds of ways to leverage leverage leverage, and have kited paper from here "to infinity, and beyond". Meanwhile, as was already pointed out, the Congress desired to socialize home ownership without facing the American public (who would have punished them had they known). Compounding all of this was the insane desire from both the business community and the Congress to recreate the "telecom boom" of the 1990s, where money was water and a mud-pie maker could get a bazillion-dollar loan. It was all fiction, of course; we never paid down any debt, and we didn't deal with Social Security or Medicare, but we had one whale of a block party using far too much of peoples' 401K funds (about $3 trillion or so) for financing. In short, we've been living even more in la-la land for the past 16 years than we did before (because we've lived there with regard to Social Security and Medicare since at least the mid-1960s, if not before). All the bills from all the foolishness and mismanagement are just about to come due. I expect one more round of the rah-rah block party, and then the whole thing is going to really, really collapse, and this time there will be no quick fix, no easy out. arclight Posted June 9, 2009 7:19 AM
- A risk nanagement program doesn't have a hope of working if actual risks are not identified. NASA presents a perfect example (at least historically, although after the loss of TWO orbiters because of failed risk management I'm pessimistic). I'm sure that most major financila organizations practice(d) "risk management" previous to the current crisis. A lot of good it did us. b. t. Posted June 3, 2009 10:12 AM
