Clifford J. Rossi can pinpoint the precise moment in the financial crisis when risk management had finally gained its due.

It was at a retreat nearly two years ago for managers from Citigroup Inc., where Rossi then worked as the chief risk officer for consumer lending. Vikram Pandit, who had just taken the reins as Citi's chief executive, told the managers that he, Pandit, considered himself to be the company's true chief risk officer.

"This was the first time that I'd ever actually heard a CEO own risk," said Rossi, who is now a professor and managing director at the University of Maryland's Center for Financial Policy. "To state so overtly to senior members of his team that risk was No. 1 — I thought that was enormously important for instantaneously building the stature of the risk organization."

Rossi had a front-row seat for not only the crisis but the events that led to it. Before working at Citi he held senior risk management jobs at Washington Mutual Inc. (for eight months) and Countrywide Financial Corp. (for three years). Neither survived the crisis as an independent company.

In interviews this week Rossi described how other business line executives routinely marginalized risk managers at those lenders.

"Risk managers were like the Maytag repairman," he said. "Out of sight, out of mind."

Worse, Rossi said, the largest banks did not rely on risk-adjusted return on capital measures, instead were hampered by a herd mentality and ignored geographic concentrations of risk.

Similar critiques have been made before, but rarely by those who were on the front lines.

Michael Schuchardt, a managing director responsible for the credit risk practice at Protiviti Inc., a risk management and consulting unit of Robert Half International Inc. in Menlo Park, Calif., agreed that before the crisis, "risk really didn't have any voice" at many institutions. "Having a risk culture or not having one was probably the most important factor in whether or not an institution made it through the crisis or not."

Rossi described his brief tenure at Wamu, which had four chief risk officers in two and a half years. The former Seattle thrift's four business lines each had a chief risk officer with dual reporting to the company's chief risk officer and to the head of the given business line.

"This is where management got discouraged with having too much risk management," he said. "They felt they had checkers checking the checkers."

At Countrywide, Rossi said, he once told top executives at a board committee meeting of the need to reserve for losses on option adjustable-rate mortgages.

"People looked at me like I was a three-headed monster," he said. "Nobody had the capability or willpower to drive home the underlying risk of holding these assets."

A core problem was that lenders and investors, lulled by strong past performance, tended to underestimate the potential for losses. Many companies fell into the trap of concentrating their loan portfolios in just a few states — notably, California, Arizona, Nevada and Florida.

While a lack of liquidity ultimately led to the demise of most of the large independent mortgage lenders, liquidity risk was regarded as "a remote event," even in the months leading up to the crisis, Rossi said.

"It's a huge lesson," he said. "You need to think of a crisis or disaster that is bad enough where you think the organization could not survive and keep that in your back pocket. We never dreamed we would get to a point where it would actually be realized."

This month Rossi completed a 60-page study for the Research Institute for Housing America, a nonprofit arm of the Mortgage Bankers Association. He found that risk managers grossly underestimated credit losses, in part because of incomplete data.

Teresa A. Bryce, the institute's chairwoman and the president of Radian Guaranty Inc., said the mortgage insurer, a unit of Radian Group Inc. of Philadelphia, changed risk managers in 2007 and upgraded its analytics.

"There's no question that we had to improve the risk culture, and I think everybody did," she said. In particular, "the issue of borrower behavior is something companies are now trying to get their arms around and nobody knows how to model that."

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