The role of systemic people risk in the global financial crisis

ABSTRACTIt is generally considered that the global financial crisis (GFC) of 2007-10 was triggered, at least in part, by failures in markets trading in complex securities based upon so-called subprime mortgages. While subprime mortgages carry greater credit risk than "prime" mortgages, the processes used to securitize these mortgages were based upon the well-established asset-based securitization model. The question raised is why the securitization of these particular mortgages caused such chaos in markets around the world. The chairman of a US Senate subcommittee investigating the causes of the GFC summarized their findings thus (Levin (2010)): Running through our findings and these hearings is a thread that connects the reckless actions of mortgage brokers...with market-driven credit rating agencies and the Wall Street executives designing the next synthetic. That thread is unbridled greed, and the absence of a cop on the beat to control it. Recklessness and greed are people-related issues that appeared to be present throughout the securitization system. This paper argues that the vast losses incurred during the GFC were, in part, precipitated by systemic operational risk, in particular, people-related risk. Using examples from documented cases, we identify some of the people risk that went unidentified and unmanaged within the securitization system until the market seized up. We then suggest approaches for addressing the increased people risk that caused problems throughout the securitization system to go unnoticed.