Risk Managers, rejoice, you are getting smarter and better looking with each passing day!  Folks who help manage risk are enjoying unprecedented respect these days, much like “overnight sensations” in the music industry whose worth is finally discovered after spending most of their careers in dingy bars.  (That analogy turned out even better than I thought it would.)  I predict that 2008 will be the breakout year for those who provide enterprise risk management goods and services as entities race to implement greater controls and deal with decreased access to liquidity.

This epiphany has come about because the last 10 years or so have been a stunningly risky period for corporate stakeholders with one massive problem after another.  The most recent, the meltdown in the mortgage industry and its subsequent effects, may have been the coup de grâce for any remaining risk-tolerant holdouts.  The growing clamor for more effective risk controls has now turned into a deafening roar.

During the past decade alone, we have had an internet boom and subsequent bust; an energy bust and subsequent boom – with an “energy crisis” thrown in the middle for good measure; numerous geopolitical conflicts; prosecutions of corporations and their executives, both justified and overzealous; natural and unnatural disasters; deregulations and re-regulations; a credit market meltdown; and assorted other calamities.  That, my friends, is risk.  No wonder people are finally looking for help.

How would YOU like to be a corporate executive these days?  Using the energy industry as an example, where would you turn for help with risk mitigation?  The commodities market?  Please.  That is often the source of the problem.  Improperly structured market positions which fail to consider associated credit and liquidity risks can doom a company quicker than remaining unhedged.  A small producer who is otherwise profitably selling its products under fixed prices in a rising market could easily see margin calls deplete its liquidity, leaving none for operating needs.  And as we all know, net income doesn’t pay the bills – cash flow pays the bills.

How about the credit market?  As we have seen, it has contracted significantly due to the surprising collapse in the mortgage industry.  While it is still possible to get funding, the terms and conditions now reflect recent events.  Exacerbating the resulting liquidity shortage, more energy entities are transacting under contracts with risk-mitigating – but logistically challenging - margin provisions and face more collateral demands as described above.

Insurance products may or may not be cost effective, either.  Although coverage continues to evolve to address the risks of structured and other transactions, insurance companies have had their share of challenges lately, too.   For example, in addition to the billions in exposure for human-caused events like 9/11 and corporate malfeasance, insured losses for natural disasters such as earthquakes, hurricanes, and floods cost the industry a record $44 billion in 2004, nearly triple the previous year, and THAT record more than doubled to $94 billion in 2005, according to reinsurer Munich Re.  To top it all off, Lindsey Lohan started driving – sort of.

International energy matters continue to produce significant uncertainty as well.  In the last year alone, energy entities have been “strongly encouraged” to renegotiate their contracts or have had assets nationalized outright in Bolivia, Venezuela, and Russia, to name a few.  Additionally, there continues to be concern over the security of the gas supply from Russia to Europe, which is also moving quickly to deregulate its gas and power markets.  Think it is difficult to implement deregulation in the U.S.?  Imagine trying to do it while considering the demands of numerous sovereign entities with different languages and national interests.  How and when it will ultimately work is still to be decided.

For some, the prospect of increased regulation by government entities represents a considerable risk as well.  For example, as executives of numerous oil majors in the U.S. found out, even if you earn a return in line with other industries, you may still be hauled before Congress and threatened with criminal sanctions and a tax on “windfall profits”.  Additionally, hedge funds are being increasingly criticized by authorities for, among other things, failing to manage counterparty credit risks and for introducing systemic risk to energy markets.  Look for them to begin to respond by enacting greater controls fairly soon.

All of these issues, as well as many others, have contributed to the growing recognition of the need for entities to navigate the corporate minefields and effectively manage enterprise risk.  That will require investment in people, processes, and systems.  In fact, even if there is a significant effort already in place, it must be demonstrably effective and bring confidence and comfort to auditors and others.

 Whether the pressure is coming from regulatory entities who want to prevent abuse, investors and shareholders who want to know the risks they are assuming, employees who want to ensure that their companies are well run, or executives who are concerned with compliance demands, the value of a solid risk management effort has never been more appreciated.

So we salute you, Mr. and Ms. Risk Manager.  2008 is your year!