Analyzing the credit crisis, you can do that interactively yourself here, shows that the most troubled companies all have been in the news with integrity issues.

Some financial institutions did fire risk managers or at least blamed their risk management department for the unforeseen impact of the crisis. Any risk manager should have had a strategy in place that manages situations in which market mechanisms stop functioning. Risk managers know that VaR calculations do not cover extreme events. In the past the LTCM case, an analysis can be found here, already showed that markets can stop functioning. The best risk management department off course predicts when such events are likely to happen and enable a company to profit from such events. It looks like only Goldman Sachs managed to do this.

But what to do when the CEO starts making decisions that are conflicting with business ethics and that increase legal risk? The credit crisis interactive analysis shows that integrity issues are the most threatening and most damaging problems for a company. Just take a look at the events at Bear Stearns and Countrywide or remember what happened at Enron. These type of problems are difficult to manage by a company’s internal function, whether it is risk, compliance, audit or the board of directors. The internal functions simply do not have the power nor the authority to withstand a CEO. The board of directors are often at too much distance to remain in touch with the operational reality and at the same time they are often to close at the personal level to remain independent. UBS recognized this, be it a little late.

The credit crisis will probably result in more legislation or more focus at Basel II pillar three. Shareholders and employees became victims from inadequate management. Senior management however often walked away with millions of dollars. Big reward at no risk!

Some examples:

• O’neal from Merrill Lynch rewarded with $160 million leaving his bank in real trouble.
• Groenink from ABNAMRO rewarded with $ 40 million leaving his bank to be split into 3 pieces.
• Charles Prince from Citi rewarded with almost $ 100 million
• Sullivan from AIG rewarded with $ 47 million severance package
• Angelo Mozilla to profit from sale to BofA.. estimations vary but are in the range of several tens of millions.

Today Yahoo! reports that Countrywide employees fear for their severance pay.When will the first employee out of a job due to failing management start a lawsuit demanding equal severance pays?
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