their effect on the firm ’ s financial condition and performance, cash flow, and earnings potential. with regard to securitizations, derivatives, and other innovative risk - transfer instruments, traditional accounting disclosures of a company ’ s balance sheet at any one time may be insufficient to convey the full impact of a company ’ s financial prospects. equally important are disclosures about how risks are being managed and the underlying basis for values and other estimates that are included in financial reports. unlike typical accounting reports, information generated by risk management tends to be oriented less to a particular time and more to a description of the risks. to take an example from the world of banking, where the discipline of risk management is relatively well developed, an accounting report might say that the fair value of a loan portfolio is $ 300 million and has dropped $ 10 million from the previous report. however, the bank ’ s internal risk report would show much more extensive information, such as the interest rate and credit quality of the assets and the range of values the portfolio would take under alternative future scenarios. the user of a risk - management report could determine whether changes in value were due to declining credit quality, rising interest rates, or sales or payoffs of loans. corporate risk officers have developed other types of reports that provide information on the extent to which the total return in a particular line of business compensates for the line ’ s comprehensive risk. on an enterprise basis, a reader of such a report can determine whether the growing lines of business have risk exposures that tend to offset those in other business lines - thereby resulting in lower volatility for the earnings of the corporation as a whole. complex organizations should continue to improve their risk - management and reporting functions. when they are comfortable with the reliability and consistency of the information in these reports, they should begin disclosing this information to the market, perhaps in summary form, paying due attention to the need for keeping proprietary business data confidential. not only would such disclosure provide more qualitative and quantitative information about the firm ’ s current risk exposure to the market, it would help the market assess the quality of the risk oversight and risk appetite of the organization. a sound risk - management system in a complex organization should continually monitor all relevant risks - including credit, market, liquidity, operational, and reputational risks. reputational risk, which recent events have shown can make or break a company, becomes especially hard to manage when off - balance - sheet activities conducted in a

the twentieth century were, without doubt, a period of dramatic change in financial engineering, financial innovation, and risk - management practices. over this period, firms acquired effective new tools to manage financial risk, one of which was securitization. many assets on a firm ’ s balance sheet, such as receivables, can now be securitized - that is, grouped into pools and sold to outside investors. securitization helps a firm manage the risk of a concentrated exposure by transferring some of that exposure outside the firm. by pooling a diverse set of assets and issuing marketable securities, firms obtain liquidity and reduce funding costs. of course, moving assets off the balance sheet and into special - purpose entities, with the attendant creation of servicing rights and high - risk residual interests retained by firms, generates its own risks. several types of securitization have grown rapidly over the past decade. one of the fastest growing has been asset - backed commercial paper, which soared from only $ 16 billion outstanding at the end of 1989 to about $ 700 billion as of year - end 2002. commercial mortgage securitizations have also proliferated noticeably since the early 1990s. the dollar amount of outstanding securities backed by commercial and multifamily mortgages has risen from $ 36 billion at the end of 1989 to just over $ 400 billion as of this past september. in addition, commercial banks and finance companies have moved business loans off their books through the development of collateralized debt obligations. securitized business loans amounted to $ 110 billion in the third quarter of 2002, up from a relatively miniscule $ 2 billion in 1989. derivatives are another important tool that firms use to manage risk exposures. in the ordinary course of business, firms are exposed to credit risk and the risk of price fluctuations in currency, commodity, energy, and interest rate markets. for example, when an airline sells tickets months before a flight, the airline becomes exposed to fluctuations in the price of jet fuel. a higher price of jet fuel translates directly into lower profits and, perhaps, a greater risk of bankruptcy. firms can now use derivatives options, futures, forwards, and so on - to mitigate their exposure to some of these risks. the risk can be transferred to a counterparty that is more willing to bear it. in my example, the airline could buy a forward contract or a call option on jet fuel to hedge its risk and thereby increase its financial stability. a relatively