Failure to Take Action

The U.S. House Committee on Oversight and Government Reform conducted a hearing on Tuesday into the circumstances leading to the recent collapse of Fannie Mae and Freddie Mac.  Chairman Henry Waxman provided the committee with several documents detailing numerous warnings by internal risk managers that were purposefully ignored by executive management.  Below is an example provided by Chairman Waxman.

On October 28, 2006, Fannie’s chief risk officer sent an e-mail to company CEO Daniel Mudd warning about a “serious problem” at the company. He wrote: “There is a pattern emerging of inadequate regard for the control process.”  In another e-mail on July 16, 2007, the same risk officer wrote to Mr. Mudd again, this time complaining that the board of directors had been told falsely that the “we have the will and the money to change our culture and support taking more credit risk.” The risk officer wrote: "I have been saying that we are not even close to having proper control processes for credit, market, and operational risk. I get a 16 percent budget cut. Do I look so stupid?"  But these warnings were routinely disregarded.

Much has been said about the failures of risk management leading to the current crisis.  However, it is becoming increasingly clear, through examples such as these, that the failure to take action on warnings provided by risk management led to the current crisis.