On seeing several criminals led to the scaffold in the 16th century, English Protestant martyr John Bradford remarked, “There but for the grace of God, goes John Bradford.” His words, without his name, are still very common utterances today, used for expressing one’s blessings compared to the fate of others. This was especially poignant for Bradford himself, because he ultimately was burned at the stake as a heretic.* The recent sub-prime crisis offers corporate risk managers inexpensive, yet critical, lessons on what to avoid so that when history decides to repeat itself in other industries, risk managers will be better able to contain or prevent the damage we’re already witnessing and are about to witness.
The current sub-prime mortgage fiasco will ultimately engender losses between $600 billion and $1 trillion to banks and other financial institutions. By entertaining unrealistic risk-reward assumptions, unduly relying on models instead of common sense, and failing to address—or at least acknowledge—the existence of conflicts of interest, a number of financial institutions now face a costly butcher’s bill. While many companies and firms are thankful—as John Bradford was—that they are uninvolved in this particular crisis, they shouldn’t overlook the fact that examining what happened, and focusing on lessons to be learned, can help all financial institutions avoid the fate of those who are wallowing in this current mess.
