One of the issues that came to light during the crash is that in most investment banks (Goldman was the exception) there was no corporate-wide risk manager; each department employed it’s own risk manager that was focused only on that department’s portfolio.
Three problems with that:
- Nobody was able to get an aggregated view of the total risk incurred across the enterprise.
- A departmental risk manager is compensated on the performance of that department. This creates a conflict of interest where the risk manager would be telling their department to back off of investment activities on which their own bonuses were based. So, they’d be telling the department to stop the very activities that was paying for their house in the Hamptons.
- The risk manager reported to the department head, so even if the risk manager tells the department head to stop investing in those risky assets, the department head could tell the risk manager to STFU or get fired.
But, the bottom line on why nobody went to jail? Well, to be blunt…..what they were doing was not only legal, it was government encouraged behavior. And the government bureaucrats and politicians that were encouraging behavior were hardly going to go after people who could finger them. :-(