Risk Managers' Stock Is Rising

As the financial world reels from massive writedowns, risk managers are moving out of the back office and reporting directly to the C-suite

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The lowly risk manager was once a mere compliance functionary, relegated to back rooms, far from the money of the trading floor. No longer. Like Cinderella transformed for the ball, risk managers are now the new belles of Wall Street, which is struggling to flush hundreds of billions in suspect loans through the financial system.

Risk has again assumed the headlines after a young trader in Paris cost Société Générale (SOGN.PA) $7.2 billion by betting fraudulently on European stock index futures and using his knowledge of the bank's risk controls to conceal the trading. On Jan. 27, Société Générale said the trader's positions had totaled $73.5 billion (BusinessWeek.com, 1/28/08)—exceeding even the bank's market value.

Who's Watching?

Risk management failures have managed to unseat CEOs at the top of the banking industry. October saw the resignation of Stan O'Neal from Merrill Lynch (MER) after he presided over $8.4 billion in writedowns from subprime mortgages, asset-backed bonds, and soured loans. A month later, Charles Prince quit Citibank (C), following an $8 billion hit to the company's balance sheet.

Coming fresh off the global fallout from the subprime lending crisis, the SocGen scandal raises stark questions about risk management systems and how critical-risk information is shared across an organization. That, in turn, is elevating the role of those who oversee risk.

"We've seen a surge in demand for qualified risk managers; they are becoming much more in vogue," says Alan Hilliker, a partner at Egon Zehnder International, a talent search firm. "Risk officers used to get a lot less compensation than front-office traders, but now with the billions lost, it's suddenly a good idea to find someone who can model risk well, and pay them nicely for it."

Giving Risk Managers Clout

Traditionally risk managers have been assigned a more advisory role, essentially functioning as referees rather than as players in the game of wealth creation. "It's very difficult to be the voice that says 'stop' when a strategy is making money," says Paul Glasserman, a professor who studies risk management at Columbia University's Business School. He notes that in the latest subprime crisis, the risks were apparent to many across the industry, but investment managers ignored warnings because of the massive profits being generated. "In the subprime contest, a lot of the risk was widely understood, but as long as the trades were profitable there was a strong temptation to keep going," he says.

Now the staggering writedowns have sobered banks, which are scrambling to assess and curtail risk. Enter the risk managers. John Thain, the new CEO of Merrill Lynch, which reported a $9.8 billion loss, established two risk management positions. Since both managers, Noel Donohoe and Edmond Moriarty, will report directly to Thain, it's clear that risk management will receive a greater audience at Merrill.