In mid-September, I was a keynote speaker at a national conference in Atlanta. The audience was insurance agents. The topic was enterprise risk management. The focus was Enron, Chrysler, Airbus and financial institutions. Next month, I am to address a similar audience in Dallas. Between the two events, we saw the collapse of American International Group Inc. and lots of others.

What am I going to say now?

Only two industry sectors have embraced ERM in any meaningful way--energy companies and financial service institutions. After Bear Sterns, Lehman Bros., Merrill Lynch and AIG, we can draw the conclusion that ERM has failed the shareholders and employees of financial firms. Or we can recognize there has been a failure to understand ERM.

The most-discussed framework for ERM came from the Committee of Sponsoring Organizations. According to COSO, ERM is a board of directors and management process applied across the enterprise to identify events that may affect the entity, manage risks within its risk appetite and provide a reasonable assurance of the achievement of objectives. Pursuing ERM, one global corporation identified 2,900 business risks and sought to manage them in an integrated process. Most companies do not see the value of such an effort.

The subprime mortgage debacle shows us that the COSO approach to ERM is a failure. We definitely need a central risk function, but its job is not to manage risk. Its goal is to identify critical risks and share its concerns with the entity's risk owners. An organization should be scanning the horizon for external exposures and within the organization itself for weaknesses in leadership, culture, and management. Then, it should share its findings.

In 2004, radio commercials offered ridiculously low mortgage rates. How could a financial services company miss such a signal? Interest rates were low but not that low. Something was wrong.

Scan externally. It took only minor investigation to see what was happening. Housing prices had been in a steep climb for nine years--a housing bubble was widely proclaimed. Some people could not afford the homes they bought. Others got into the game after watching their neighbors get rich by purchasing and flipping second homes and condos. Las Vegas and Florida were particularly hot. A downturn in housing prices could be bad news for many people.

Scan internally. Banks were the originators of loans, but they did not hold them. The security markets were searching for higher yield returns. Banks could sell off housing loans and earn a return far greater than their invested capital. Everybody believed they gained on mortgages that carried extremely low annual interest rates that then jumped dramatically after a few years. The temptation to relax credit standards, or eliminate them entirely, would lead to disaster if housing values declined.

AIG, Merrill Lynch and others have bright leaders and managers. How could they not see the exposure? One answer is that they had internal auditors, compliance officers and quantitative models to manage risk. Such tools lull us into believing that we can predict the future and limit the impact of exposures. This may be true for risks that are the subject of internal audit. It is not the point of ERM. We gain little value from central management of thousands of business risks. If we have such a program, it can be nothing more than a description of our internal controls. We need something different.

We can broaden the need for ERM to our country as a whole in this time of crisis. Scan internally. When Congress failed to pass a bailout bill on Sept. 29, the American public seemed to support the action. The media reported letters, e-mails and telephone calls running 100-1 against passage. An ERM evaluation of the situation shows a failure to correctly identify the real risk.

Scan externally. The global economy and financial systems are in jeopardy. Something needs to be done.

Scan internally. It is all about getting elected. Thus, our leaders focus on inconsequential issues: Do not allow large severance packages for the CEOs of the failed companies. Raise the FDIC guarantee on individual deposits from $100,000 to $250,000.

Scan more internally. Banks are reluctant to lend for car or home purchases. Businesses are having a tough time exercising their lines of credit. People are losing their jobs. These are pretty big risks.

Nobody knows whether a bailout will work, but we can be pretty sure that severe consequences accompany a failure to act. Once again, we focus on the wrong description of risk. If the $700 billion bailout passed, it could cost $2,333 of future debt for every U.S. resident. When it failed, common stock values dropped about 6% around the world. With a global stock market cap of $51 trillion on Sept. 30, we lost $5,000 for every person on the planet. Since Americans hold a disproportionate share of wealth, the real loss was much greater for the United States.

From an ERM perspective, it is more important to save the economy and worldwide financial markets than to worry about already wealthy CEOs and a change to guaranteed deposits? If we assess the risk correctly, the issue is not about bailing out poor decision-makers and crooks. It is about stabilizing the financial system and economy of the world.

So what will I say in Dallas? No matter what else transpires in the upcoming weeks before the elections, I will remind my audience of the statement by the famous philosopher Woody Allen:

"More than at any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly."