Financial Times

Western culture may have caused sub prime crisis

Cultural leanings towards credit in the west compared to preferences towards savings in the east may have been the root cause of mortgage defaults that led to the global credit crisis, according to Philip Rao, an 18-year financial services veteran and Partner of Ernst & Young’s Risk and Business Solutions practice.

Mr. Rao also pointed out that the ‘sub prime’ crisis was a result of not enough regulation and that ratings agencies were partly to blame for overly high bond ratings which should have instead been based on ‘substance rather than form’. This led to many organizations investing in what they believed to be safe mortgage based derivates endorsed by organizations such as Lehman Brothers, Freddie Mac and Fannie May, which have ultimately led to a number of financial institution bankruptcies as far away as Japan. In addition, it is possible that this crisis may only deepen as he notes that out of the 44 million mortgages in US, 35% were ‘sub prime’ mortgages which were instrumental in the collapse of the mortgage market.

Mr. Rao’s comments proved particularly impactful as the topic of his presentation, “Enterprise Risk Management: The Art of War”, outlined the importance of strategic Risk Management, which is an area where several global companies have proven lacking in recent days. Held recently at the Cinnamon Grand, Mr. Rao used lessons from “The Art of War”, a 2,500 year-old masterwork by legendary Chinese General and Master Strategist Sun Tzu, to explain to an audience comprising Sri Lanka’s top business leaders of the necessity of risk management.

Indicating that enterprises are at war all the time, whether for market leadership, talent or capital, Mr. Rao suggests that it is imperative that enterprises always be prepared. His presentation identified two broad objectives for risk management to achieve: keeping out of trouble by preventing most problems as well as reducing the impact of problems that will occur no matter what, and making business better by identifying which risks need to be taken to improve business.

He also indicated some practical steps to make risk management work in any enterprise: understand the current state of managing risks in an enterprise and evolve from there; train a risk-aware workforce who consider risk management part of their day-to-day activity; embed risk assessments into strategic planning process, with key strategies reviewed, challenged and considered from the risk angle with actions to manage them; make the board responsible for risk management with implementations of the Chief Executive Officer.

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