Arithmetic was never my strong suit in school, but here is some math that even I can understand: "At 30 to 1 leverage, a 3% or 4% drop in asset prices means you're wiped out."
I thank Joseph Rizzi for the simple yet profound clarity of that equation. Mr. Rizzi is senior investment strategist at CapGen Financial. He was the guest speaker last month at a program on the lending crisis put on by the Center for Corporate Governance at Drexel University's LeBow College of Business. His presentation was the best I've heard all year in identifying the roots of the crisis and what needs to be fixed, from a governance standpoint. I'll be wanting to get more of his keenly observed analysis into the pages of Directors & Boards in the year ahead.
I thought of his comment when something else just came across my desk: "Risk managers will emerge as heroes from the financial crisis." That's a powerful statement, put out by Joe Plumeri (pictured here), chairman and CEO of global insurance broker Willis Group Holdings. Speaking at the annual dinner of the Association of Insurance and Risk Managers on Dec. 10, Mr. Plumeri said that risk managers have never been more important than they are today in helping their companies evaluate risk and access capital.
I had the pleasure of interviewing Mr. Plumeri for a Directors & Boards cover story a few years ago. He calls it like he sees it, and this is picture-perfect vision.
I'm not sure how heroic it is to stare at a 30 to 1 leverage ratio and not recognize that there is, in the lyrics of my favorite movie musical, "trouble in River City." According to reports, Lehman Brothers was levered 32 to 1. Lehman is among the wiped out.
But directors should appreciate the implications of Mr. Rizzi's risk equation and Mr. Plumeri's shining the spotlight on the role that risk managers can and should play in their deliberations on risk. The heroic nature of risk managers should come from keeping the leadership in a risk-aware state — note that I didn't say risk-averse state — and not from having to push back against a culture that, through ignorance or denial, could cause the board to preside over a wipe out.
