Academic journal article Journal of Business Strategies

Risk Management Lessons from the Financial Crisis: A Textual Analysis of the Financial Crisis Inquiry Commission's Report

Academic journal article Journal of Business Strategies

Risk Management Lessons from the Financial Crisis: A Textual Analysis of the Financial Crisis Inquiry Commission's Report

Article excerpt

"Those who cannot remember the past are condemned to repeat it."  --George Santayana (Philosopher) 

INTRODUCTION

The financial crisis of 2008 and 2009 was the worst financial disaster to hit the United States in over seven decades. Organizations of all types were impacted as the events in the financial industry rippled throughout the economy. The crisis left the economy in shambles, dissolved trillions of dollars in wealth, and left millions of people without jobs and homes (Financial Crisis Inquiry Commission [FCIC], 2011). There have been many opinions about what the root causes of the crisis were (Jickling, 2009). While some recent research has suggested that excessive investment in financial products (both ordinary and exotic) were a considerable culprit (e.g., Tuckman, 2016; Vo, 2015) there has been much less work focused on the impact that risk management failures at the managerial level had on failing financial firms (e.g., Hubbard, 2009).

In 2009, the U.S. Government commissioned a committee to look into the causes of the financial crisis. This committee, known as the Financial Crisis Inquiry Commission (FCIC), gathered and analyzed a myriad of data before putting out a complete report based upon their extensive analysis, outlining what it believed to be the main causes of the crisis. While this report was made public, there has been little exploration or discussion of the findings in academic circles (per mention in academic research papers) especially as it relates to risk management within organizations. This is unfortunate since the report is built upon a vast amount of information and has implications for management practices related to the management of risk.

As suggested by the quote above from George Santayana, it is thought that finding a cause(s) can help businesses learn, and hopefully avoid, making the same (or similar) mistakes in the future. The purpose of this paper is to look, qualitatively, at the commission's in-depth report, analyze the passages around risk management and discuss the implications of the findings. Additionally, this paper explores whether financial and non-financial firms have learned from the failures identified in the commission's report.

The purpose behind expanding the study beyond just the large financial firms associated with the crisis, was to assess the degree of learning (if any) at other large, visible firms. The organizational learning literature (Huber, 1991; Madsen and Desai, 2010) has suggested that firms can make adaptations to its business operations and strategy as a result of reflections on their own experiences (experiential learning) or the experiences of others (vicarious learning). Financial institutions that were at the center of the crisis (such as the large financial firms and large regional banks) should be most likely to have made adaptations post crisis. However, we might also expect that other large, visible firms would make adaptations due in part to what they learned from the failings of these financial firms. However, the changes may be less pronounced since those firms were further away from the actual learning event.

In doing so, this paper makes three important contributions to the extant literature in risk management and organization studies. First, this paper adds to what is currently known about risk management failure, and more specifically risk management failure during the financial crisis. While much has been made about the failure of complex quantitative risk management systems, less is known about managerial-level failures. Second, this paper synthesizes and condenses a broad array of disparate statements in the FCIC report on risk management during the crisis into a small set of important risk management issues. These issues are described and discussed in detail so that managers and organizations (in all industries) can learn from the mistakes of these failed institutions. Last, there are prescriptive remedies given to help companies avoid risk management failures in the future. …

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