Risks, wagering and financial markets.

• Author: Cangemi, Michael P.
• Position: President's page

On March 28, I listened to U.S. Treasury Secretary Henry Paulson speak about capital markets to the U.S. Chamber of Commerce. He discussed how the housing market fared overall in the subprime credit crunch. One of his remarks struck me. He said, "A correction [in housing prices] was inevitable."

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To most financial executives, this statement is not very surprising. However, during the last decade, as housing pricing continuously crept upward, many lenders ignored or chose to believe the inevitable cyclical ebbs and flows of our housing market could somehow be averted. The cover story in this issue of Financial Executive deals with how inadequate risk management exacerbated the subprime crisis. If lenders and consumers were willing to believe the housing prices would always increase, how did this escape the scrutiny of some risk managers?

In many organizations, as the CFO role continues to evolve, risk assessment is now part of the CFO's responsibilities. In some organizations, risk has been managed effectively, and they shied from overexposure to subprime securities. Those that did not manage it well have paid a significant price--in some cases with their jobs, and usually with a significant decline in their company's market value. Bear Stearns, of course, saw its market value almost wiped out and its independence disappear.

As some of you know, I started my career working for Merrill Lynch while still a junior in high school. I studied Wall Street history and literally fell in love with the excitement of the market. I began investing, and soon learned the inevitability of the cyclical market trends.

Over my lifetime, markets and business in general have become much more complicated and sophisticated, thanks in part to the rapid advance of computer and communications technology. I believe this technology advance has played a major role in the subprime debacle.

If you study early Wall Street history, you will encounter a trader named Jesse Livermore, who grew up working at various Wall Street "bucket shops," or betting parlors. In the pre-regulated market era, individuals were able to make wagers on how a particular stock would perform. These betting parlors were eventually outlawed; however, as we all know, they returned in the form of regulated options markets.

Investment maven Jim Cramer, author of Mad Money and Real Money, among other books, compares investing to gambling. He highly recommends that a large portion of...