Lessons from the abyss: the credit market meltdown and risk management; As the subprime mortgage malaise and related woes continue to roil the credit markets, issues of risk management and regulation are getting new attention. Hard lessons will be learned, many of which are just now beginning to be understood.

Stocks fell sharply on Friday morning, March 14, as they often have in recent months. But the cause of the tumble wasn't another snowball in the avalanche of bad news from the mortgage and credit markets. It was that venerable Wall Street firm Bear, Stearns & Co. found that its cash position had cratered in the previous 24 hours and it needed emergency financing.

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That quickly came when JPMorgan Chase & Co. and the Federal Reserve Bank of New York stepped in to provide a financial life raft to Bear Stearns, the fifth-largest U.S. investment bank. That was a Friday. By Sunday afternoon, Bear Stearns had been sold to Morgan in a fire sale for just $2 a share; it had closed Friday at $30, off 47 percent on the day. Following a furor over the sale price, it was later upgraded.

Bear Stearns' meltdown was just the most recent in a hornet's nest of problems besetting financial firms, which has morphed into what some are calling the biggest financial crisis since the Depression. What has stood out to many in the market is the players' continuing inability to sense how serious the problems are (or their ability to wish them into manageability) or where the bottom might actually be. Predictably, the blame is falling heavily on the firms themselves.

"The [Bear Stearns] CFO yesterday said fears of liquidity concerns are overblown," Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, N.J., lamented to Reuters on Friday morning. "What happened in 24 hours that they didn't know 24 hours ago? But overnight, the company needed a government bailout."

It was just a day earlier, March 13, when Secretary of the Treasury Henry M. Paulson stood at a lectern at the National Press Club in Washington and spoke to a just-released report, "The Policy Statement on Financial Market Developments." Looking around the room as he spoke, he said, "We are working to get through the current period of market turmoil while minimizing its impact on the economy."

Unfortunately, for financial firms and their investors, the stock markets in general and now the overall economy, "the current period of market turmoil" seems unending. The trend since last summer has been a sickening slide, marked by sharp volatility, triggered by a credit crisis with roots in the mortgage market and the securities tied to it.

The Federal Reserve has practically tripped over itself in recent months in its rush to inject capital into a credit-starved marketplace, slashing interest rates and implementing unprecedented liquidity policies. But, as the events have unfolded across both public and private markets--hedge funds and private equity players also have suffered tremendously--it has become clear that no agency can rein in the forces of markets run amok. A mighty river of woe has washed over the credit markets, and when or how they can recover--especially when security price implosions keep raining on the market and a recession is baring its fangs--is utterly unpredictable.

Books will be written on the 2007-8 credit meltdown, and how the housing bubble and subprime mortgage excess helped create and prolong it. The depth of the crisis sparks larger questions about governance and risk management at time when--viewed from a distance, at least--they seemed in short supply at scores of huge financial firms.

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As FEI President and CEO Michael Cangemi wrote recently in a note to FEI members, "Lax credit standards for mortgages, compounded by huge quantities of multi-tier securitizations that were driven by fees and perhaps greed, resulted in significant risks for firms with large volumes and concentrations of these securities. Easy credit also resulted in risky leverage levels. Rather than assessing these risks, business and risk managers convinced themselves that housing prices would always go up."

Put more simply, the fundamental problem is that financial institutions and the investors they sold to broke the first and second commandments of finance: "Remember that there is no return without risk" and "know what risk you are taking."

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Among the key issues that will be explored in coming months:

* Risk modeling, especially of exotic and highly complex instruments;

* Overall risk management and the role of executives and the CFO;

* Transparency, integrity and reputation;

* The herd instinct and chasing yield; and

* The role of regulation and government.

THE FAILURE OF RISK MODELING

Investors put their confidence in a false "science" of finance. The financial industry as a whole relied on highly quantitative risk measurements drawn from the natural sciences. The most widely used is Value at Risk (VAR), which claims to take into account all of the relationships, correlations, co-dependencies and risk profiles of every security and trading position, and come up with a total risk measure.

VAR looks good on paper, but as physicist-turned-banker Riccardo Rebonato points out, the numbers that come out depend on the data that go into the models. Financial risk managers were ignoring the real world and failing to adjust their models for changes that made the data questionable at best.

For example, some used only the last five years of data to calculate risk, even though, in general, interest rates had been falling and home prices rising for considerably longer. The quants also ignored the fact that things work differently in good times than in bad.

As former Federal Reserve Chairman Alan Greenspan noted in a March commentary in The Financial Times: "The essential problem is that our models--both risk models and econometric models--as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality."

According to Bear Stearns' annual report, $29 billion in mortgages and mortgage-backed securities on its books were valued based on computer models "derived from" or "supported by" observable market information. Another $17 billion, however, were valued based on "internally developed models or methodologies utilizing significant inputs that are generally less readily observable"--a sizable understatement.

In severe market disruptions, correlations emerge that may never be seen in normal markets. In the late 1990s, for example, the East Asian financial crisis spread contagion through Latin American and Russia, and the failure of the hedge fund Long Term Capital Management threatened to bring down the entire world financial system.

"When asset prices, rather than offsetting each other's movements, fell in unison on and following August 9 last year, huge losses across virtually all risk-asset classes ensued," Greenspan wrote in his article. "Negative correlations among asset classes, so evident during an expansion, can collapse as all asset prices fall together, undermining the strategy of improving risk-reward trade-offs through diversification."

Eugene Ludwig, CEO of financial services consultantancy Promontory Financial Group in Washington, D.C., and the Controller of the Currency--one of the top banking regulators--in the 1990s, adds, "Everything converges in a financial storm. Things that don't appear to be correlated become correlated."

Peter Cohan, a management consultant, venture capitalist and writer on financial issues in Marlborough, Mass., says, "I don't know if any of [the modeling] is actually more complicated. But clearly, the models stopped working.... [The modelers] were probably using past patterns, but the fact is that there are discontinuities. It was the same thing in 1998, when Long Term Capital Management [collapsed]."

Says Ludwig: "What's really wrong [with risk modeling] is that everyone has spent unbelievable amounts of money focused on the central part of the bell curve, the two-standard deviation event, without enough attention on the distributional tails."

The risks were, first, correlation risks, and second, liquidity risks. As reporting by Fortune magazine and The New York Times showed, Citigroup's massive exposure to the subprime crisis came from liquidity puts--agreements that gave collateralized debt obligation (CDO) buyers the right to sell the instruments back to Citi at their original value.

Yakov Amihud, the Ira Rennert Professor of Entrepreneurial Finance at New York University's Stern School of Business, says, "When they did the pricing, they overlooked the need to price liquidity." Amihud's work shows that liquidity can make a difference of as much as 30 percent in the price of a security.

Lots of blue-chip financial firms have had eggs plastered on their faces in recent months, essentially confessing that they couldn't fathom what was happening. At Citigroup, the value of its Falcon Strategies Plus fund--a leveraged fund that invested heavily in CDOs--fell sharply as the value of the securities plummeted. "The magnitude of our ongoing crisis is significantly outside our expectations, both in terms of velocity and magnitude," Citigroup noted in a letter to investors.

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AIG, the insurance giant, confessed earlier this year that losses for last October and November on its CDO debt was more than four times what it had forecast late in 2007.

RISK MANAGEMENT PROCESSES FALL SHORT

At the end of last summer, senior regulators from France, Germany, Switzerland, the United Kingdom and the U.S. formed the Senior Supervisors Group to the Financial Stability Forum to discuss which risk management tools used by firms to deal with the credit crises were most effective.

In a report on March 6, the Senior Supervisors Group concluded that what led most directly to subprime mortgage-related losses "were the strategic decisions that some firms made to retain large exposures in super-senior tranches of [collateralized debt obligations] that far exceeded the firms' appreciation of the risks inherent in such instruments."

Gordon Burnes, a vice president at OpenPages, a provider of enterprise risk management software based in Waltham, Mass., says, "What was really interesting [about the regulators' conclusions] was that the way companies look at and manage risk at the management level was really a major determinant of whether they were stuck with losses. It's an interesting perspective on how to structure your risk management practice.

"Many companies don't do well at embedding enterprise risk management within the day-to-day business processes of the firm," Burnes adds. Credit Suisse in late February made a surprise announcement of additional writedowns of almost $3 billion--an error that really was a valuation issue, he notes, stemming from the investment bank using outdated pricing.

"As good as risk management has become, it's not as robust as anyone would like," says Promontory Financial's Ludwig. "[And] there are shortcomings in any regulatory regime. The task regulators have to fulfill is devilishly difficult; they have to contend with a complex financial system, a global world and a dynamic marketplace."

The shortcomings have been practically universal. "There's been [an] exponential increase in the complexity and the quantity of these very complex derivatives and other kinds of financial engineering instruments outstanding," Citigroup Chairman Robert Rubin said in a March interview on the MacNeil/Lehrer News-Hour. "And, I think that most people who deal with these instruments probably do not fully understand all the risks that are embedded in those instruments that can materialize under unusual circumstances."

Denise Grant, a member of Russell Reynolds' Corporate Officers Sector who previously headed mortgage-backed securities issuance at housing giant Fannie Mae, says, "You need to know what threats there are to the enterprise, assess those and use judgment. We're talking about holistic risk. Market risk is part of that ... Having blocking and tackling in place can't substitute for domain knowledge.

"Companies that do well marry blocking and tackling with a strategic overlay of things that are designed to help, but we need to be designing things that give us real feedback" on what is happening with respect to risk, she adds.

Where were the CFOs in all this? They aren't speaking publicly, and some have resigned as the fires raged in recent months. Consultants often argue that risk management be placed directly under the aegis of the CFO, but at huge and diversified financial firms, that's really not practicable. While they aren't blameless, neither are they the chief culprits.

One of the few heroes to emerge in press coverage of the crisis is, in fact, Goldman, Sachs & Co. CFO David Viniar, who is largely credited with insisting that the huge investment bank temper its bets on exotic subprime securities. "He did something bold," says Grant. "He said, 'Let's look at our risk management practices and determine if there is an overexpose and if we need to alter our position."'

Asked what kind of qualities she would like to see in a CFO brought into a troubled financial company, Grant says, "Judgment--demonstrated judgment in a complex environment. You need to be able to synthesize numbers and assess the external environment. The role of the CFO becomes much more difficult."

TRANSPARENCY, REPUTATION AND HONESTY

Recent changes in the structure of the financial industry have introduced new and darker shades of risks. Some financial institutions were working hard to get risky CDOs out of their own portfolios at the same time as they were persuading customers to put more of the same assets in their portfolios.

Michael Jensen, the Jesse Isidor Straus Professor of Business Administration, Emeritus at Harvard's Graduate School of Business Administration, sees this as a failure of integrity.

"These institutions have almost no integrity anymore," charges Jensen. "By integrity, what I mean is they don't honor their word." Citing reporting by The Wall Street Journal, he explains that one group at Goldman Sachs was pumping hundreds of billions of dollars worth of CDOs into the market even as another group "understood that this stuff was dramatically overvalued and was shorting it."

"It's interesting that it was Goldman, one of the investment banks that over the years has been most honorable or principled. In this case, it appears that at the very highest levels of the organization, they didn't care--they were going to make money on both sides of it," Jensen says.

"I am exactly willing to be on the record speaking of Goldman," he adds. "If the facts as reported by The Wall Street Journal are wrong, I'll correct it. Goldman didn't crater and cause this whole crisis themselves, but for me it's the canary in the coal mine that shows how far the system has declined in integrity."

In the broader picture, the securitization of assets like mortgages has rewritten the game, for originators and Wall Street. "The people actually writing the mortgages and nominally lending the money didn't bear the costs of writing bad mortgages," Jensen says. By separating the functions of mortgage origination, securitization and investment, incentives were created for agents to act in their own interest, to the detriment of the whole.

Says Cohan: "Their incentive was to get the deal sold and done with. There's no incentive related to investors making money" on those securities. As for "curing" the imbedded securities that are deteriorating in value, "you would think that would involve the people who knew the securities, but they are out of the loop. The whole idea is not to go back and try to salvage the investment.

"A second issue relates to the way people get paid," he adds. "The salespeople get a percentage of the deal, and they don't have to worry about costs or profits. When you get a piece of the action, the incentive is to do the biggest deal."

Then there is transparency, which can protect investors, at least in theory. The exotic instruments that were being sold--and bought by other financial firms--included a lot of "toxic debt" that was so complex as to be literally opaque.

These securities included mortgage-backed securities; structured investment vehicles; collateralized debt obligations and collateralized loan obligations; credit default swaps; auction-rate securities; constant proportion debt obligations and liquidity puts. With assets sliced and diced into myriad pieces, even seasoned quantitative analysts would have struggled to understand them.

Still, as Cohan notes, the securities often carried high ratings--sometimes triple-A--from the top ratings agencies. That gave them the patina of respectability, he says, where in the cold light of day, many of the subprime mortgage-backed securities turned out to be predicated on forged or falsified loan documents.

THE HERD INSTINCT AND THE CHASE FOR YIELD

Leave it to Greenspan to cogently summarize why the problems became so widespread: "One difficult problem is that much of the dubious financial market behavior that chronically emerges during the expansion phase is the result not of ignorance but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share," he wrote in his Financial Times article. Or, as one financial services executive put it not long ago, "No one ever made money by sitting out a boom."

Cohan points out, "What actually happens is that they get faulted for not making as much in the upswing--the other Wall Street banks were being penalized for not making as much as Goldman Sachs. They loaded up on CDOs, which they thought Goldman Sachs was doing."

Indeed, published reports have indicated that former Merrill Lynch & Co. CEO Stanley O'Neal was so obsessed with Goldman and its seeming invincibility that he pushed Merrill into loading up on risky CDOs. Those securities got walloped last summer as the credit markets turned down and liquidity began drying up, and Merrill was forced to write down billions of dollars' worth--a process that isn't necessarily over. And, oh yes, O'Neal was forced out by his board last fall.

"It's all intensely competitive. What happens is that a follower has to turn on a dime and get awfully good at risk management," says Cohan. "For management and the board, there are two principal risks: losing money and falling behind the competition."

New Jersey-based CIT Group, the asset-based lender, clearly sensed that its foray into subprime mortgages wasn't going to be the disaster it was. "There were a lot of smart people out there who are in it deeper than we were," CEO Jeffrey M. Peck told The Wall Street Journal. By late March, CIT's ratings had been downgraded and it had to tap its backup credit line; it was said to be looking for a capital partner.

Foreign banks, too, were caught up in the chase for yield as interest rates were declining. From giants like UBS AG to Credit Suisse and HSBC and to lesser firms like Dutch bank NIBC Holding, they snapped up highly rated but eventually dubious securities, in part because everyone else was doing it. If there were cautionary voices, they were lost in the stampede.

Hungry for yield, securities buyers crept farther and farther into riskier and riskier territory, and in the current crisis, found "a whole new way to lose money," says Charles Smithson, founding partner at Rutter Associates, a New York-based advisory firm specializing in credit portfolio and market risk management.

Previously, he explains, losses came when lenders underestimated the risk of default or recovery. Mortgage securitization was supposed to address that risk by pooling loans, carving them up into tranches, and thereby bringing the security of diversification to credit markets. But mortgages weren't as diversified as the financial engineers thought. "The mathematics that caused everything to come down was correlation--we didn't believe that mortgages were as correlated as they have been," Smithson says.

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He also sees an over-reliance on the ratings agencies. While they had a track record of success in rating other forms of debt, he says, that expertise didn't carry over to mortgage-backed securities.

But investors were willing to suspend disbelief when they saw the ratings. "If somebody came and showed me something rated AA with a yield 200 basis points above other AAs, you know if it's got a higher yield, it's got risk somewhere," Smithson reasons. People should have asked what risk they were being paid extra to bear, but didn't.

Former SEC Chairman Arthur Levitt Jr. wrote in a March op-ed in The Wall Street Journal that "credit rating agencies needs to adopt, as they have proposed, systems that more accurately reflect the risks of differing types of debt. But Congress should also give the SEC greater authority to examine the reasonableness of the ratings issued [and] to take enforcement actions if necessary."

ROLE OF REGULATION AND GOVERNMENT

Taking a long-distance view, regulatory policy in the U.S. for many years--and particularly in recent years--has been working to promote home ownership on the widest possible scale. Banks and mortgage companies were pursuing this policy when they developed CDOs that spread risk and made mortgages available to a wider population.

And, financial innovation and securitization did have a track record of success. "In the past five or 10 years, you had people looking at standard mortgage products and saying, 'Is there any way we can tweak these products so we can offer mortgages to people that have historically been unable to get into the home ownership business?'" asks Clifford W. Smith Jr., professor of Business Administration and Finance at the William E. Simon Graduate School of Business Administration at the University of Rochester.

In a period of low interest rates and rising home prices stretching back to the early 1990s, the old rules of mortgage lending looked too conservative. But then, unexpectedly, interest rates started to rise, and home prices fell. Smith sees the current crisis as a "perfect storm" of aggressive financial innovations and "inconvenient" interest rate and real estate environments.

As noted earlier, the Federal Reserve Board under Chairman Ben Bernanke has taken unprecedented actions to boost liquidity, through a combination of slashing discount rates and serving as a backup lender for troubled investment banks. And the Bush administration has had to temper its anti-regulatory fervor in the face of a public cry for action.

The Working Group on Financial Markets report, summarized at the right, was the first fruit of that effort. At the end of March, additional regulatory ideas were brought out, and there will be more. The most arresting idea at this point may be the call for the Federal Reserve to act as a "market stability regulator" that could step in during financial crises, rather than the fragmented oversight going on now.

However, any changes will be intensely debated. The Bush administration, while it has put out wide-ranging reform ideas, favors market discipline over the cudgel of regulation. Given that a presidential election and control of Congress are at stake in November, it will be a long time before anything gets enacted.

"How regulators address the problem will be interesting," Cohan muses. "There will be another financial crisis. As opposed to focusing on the controls that are effective now, they may need to think more broadly, and decide what do they really push businesses to do." A reform program that doesn't allow profitability, he believes, will be circumvented.

Ludwig, the former banking regulator, is dismissive of much current oversight. "You can't have a massively uneven regulatory environment," he argues. "Commercial banks get enormous regulation. Many non-bank financials get next to none. This imbalance is not sustainable. It tempts money out of the regulated system into financial pockets that are not transparent."

Treasury's Paulson plans to address regulation for banks, as well as call for a commission to oversee mortgage originations. That seems sensible, given that shoddy underwriting really sparked the debacle. Citigroup's Rubin also has argued that margin and capital requirements may be needed for some of the more exotic instruments that have exacerbated the crisis.

Prof. Smith's great concern is that Congress will now make a risky situation worse by passing legislation that, in essence, rewrites mortgage contracts to give borrowers a break. "While that makes potentially good politics, there are facets of it that make absolutely scary economics."

That's because the people who originated the loans no longer own the loans, and are often out of business. The people who own the loans and the people servicing the loans had nothing to do with origination, but rely on contracts that specify the returns to which they're entitled.

Vaunted WorldCom Inc. whistle-blower Cynthia Cooper, interviewed in Fraud magazine this past winter, said, "Regulating in crisis mode can result in the pendulum swinging too far. We must find the political will to proactively institute balanced regulation, and require greater transparency and disclosure to minimize excessive market bubbles and better protect consumers and investors."

Easier said than done. As a start, understanding what has gone wrong will do much to set the tone for what kind of recovery, and what kind of regulation, the world credit markets can expect.

JEFFREY MARSHALL ([e-mail]) is Editor-in-Chief of Financial Executive and GREGORY J. MILLMAN ([e-mail]) is a freelance writer in New Jersey and frequent contributor to the magazine.

RELATED ARTICLE: What Should Directors Be Doing?

"Where were the boards?" asks Bruce Ellig, an advisor to corporate boards, in a common refrain surrounding the credit crisis. "The responsibility should ultimately rest with the board."

At IMD, the business school located in Lausanne, Switzerland, Prof. Paul Strebel says that at institutions that took some of the biggest hits, boards were not asking enough questions. In part, that's because few boards had enough financial sophistication to understand the business, and in part because too many boards are chaired by a member of management, usually the CEO.

"I believe it's unreasonable to expect board members to dig into arcane minutiae of models, but board members need to discuss assumptions behind models, and that's what management needs to put on the table--like accounting assumptions. Then what happens if the underlying structure changes? Models don't help us when the world is shifting rapidly, and it's exactly that common-sense risk assessment boards have to prod management on," Strebel explains.

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"The main thing that boards have woken up to is not just auditing in terms of making sure the columns line up; the board has an obligation to look at risk management overall, to guarantee the company's sustainability," says Theodore Dysart, a Chicago-based managing partner of the Americas for the Global Board of Directors practice at search firm Heidrick & Struggles. "If you look at the fiascos we've seen during the last five to 10 years, they came from breakdowns in risk management.

"There are obvious instances where boards missed the risks to the corporation," he adds. "What you want to see is an environment where the board is pressuring the management team to [outline] what the risks are to the enterprise."

Fifty-five percent of the risk, audit and finance executives from 200 companies polled recently by management consultant Oliver Wyman said their boards were driving overall enterprise risk management (ERM). And, financial services is perceived as having one of the more mature ERM processes, among vertical industries. The survey concludes, however, that the integration of ERM into corporate cultures is still in its early stages.

Clearly, directors at companies facing huge writedowns and plummeting share prices have a tough challenge. "You have to ask questions in the right way," says Dysart. "You can't distract management from what actually happening, but making sure management is addressing risk appropriately." That means having "the courage to ask the tough questions, and stand behind management if the situation is right."

Riccardo Rebonato, global head of market risk at the Royal Bank of Scotland, sees a breakdown in basic fiduciary responsibility on the part of the affected boards. "The quantitative risk management project has been carried out at times without adult supervision," he says tartly.

Still, the vaulting complexity of the securities and their behavior in the market has been a complicating factor. How could a veteran of the retail clothing business, for instance, even if a highly competent director, ask intelligent questions about what was happening?

A former CFO at a New Jersey company says, "The best thing you can have as a director is honest management." In companies with highly technical businesses, he says, directors may largely be clueless about the risk profile and may be especially reliant on management for an accurate risk assessment.

What of the directors at Bear Stearns? "The first thing that will happen is that they will be sued," said John J. Levy, CEO of Board Advisory Services in Westfield, N.J., during an FEI forum in March. But he quickly added that if Bear Stearns directors could show that they used a deliberative and analytical process to assess the financial risk, they wouldn't be held culpable. That wouldn't be true, he said, if they told management, "Sure, if you want to invest in subprime mortgages, go ahead. We don't understand them, but go ahead anyway."

Ideally, Levy adds, the entire board sets strategy, including the identification of market risks and opportunities and a strategy to mitigate those risks--including the establishment of early warning systems.

In the end, the best course for boards may be the policy that Rutter Associates founding partner Charles Smithson says he heard from a CEO recently: "If it can't be completely explained to the board in 30 minutes, then we're not doing it."

--JM and GJM

RELATED ARTICLE: What the Government Recommends

On March 13, the President's Working Group on Financial Markets released a "Policy Statement on Financial Market Developments" that offered six key objectives to "help reduce the likelihood that mistakes of the past are repeated." Quoting from the report, they are:

1. Stronger transparency and disclosure. The challenges of complexity were exacerbated by opacity. The best antidote to opacity is transparency and disclosure.

2. Stronger risk awareness. Regulators and all market participants must be more aware of and better able to respond to risks. Credit rating agency practices must improve, and the users of their services must rely less on, and appreciate more the limitations of, ratings products.

3. Stronger risk management. We need improved risk management practices by investors, issuers, financial institutions, rating agencies and regulators alike. Risk management is everybody's business.

4. Stronger capital management. Well-capitalized institutions are better prepared to deal with challenges, foster economic growth and enhance market confidence.

5. Stronger regulatory policies. Regulatory policies, including capital requirements, must address risk management weaknesses and improve the safety and soundness of our institutions and financial system.

6. Stronger market infrastructure. Perhaps the best example of innovation is the over-the-counter (OTC) derivatives market. These markets have grown tremendously, but the infrastructure has not kept up--and it must.

RELATED ARTICLE: TAKE AWAYS

** Some are calling the current credit crisis the worst since the Depression. Few financial institutions have been spared from the impact of down-spiraling securities, many tied to subprime mortgages.

** Risk management has become a key concern, and the way that companies approached it has helped determine how badly they have fared. Experts say the risk in securities was often ignored or glossed over, particularly if they were highly rated.

** Risk modeling has taken a hard fall. It seems that too many institutions focused on the more obvious potential risks--and the ever-increasingly global nature of risk brought the less obvious risk "tails" into play.

** The "herd instinct" and the chase for yield offer lessons of how not to navigate through a credit minefield. Too many financial firms seemed to feel there was safety in numbers, or that if they sat things out, competitors would gain ground.

** Directors bear some degree of culpability, but it's not clear how ordinary directors could have been expected to challenge management on how to act when the markets began seizing up.