Thursday, August 14, 2008

Confessions of a risk manager

Great article on the Economist website giving the views of a risk manager at a major bank at what went wrong in the credit crunch.

We had not fully appreciated that 20% of a very large number (of AAA bonds) can inflict far greater losses than 80% of a small number (of sub investment grade bonds).

italics added by me

Although he doesn't blame the traders, he does say that the risk managers were frequently ignored or overruled, or were under pressure to approve deals. And not surprisingly, the most pressure was on the highest returning deals....