A rare sight

Watching the mill stream on Sunday in Wiltshire I noticed that something was making ripples through the water. I then saw the tail of an animal as it made its way across the spit of land that divides the mill stream from the mill race which, with the volume of water escaping ,was a mini Niagara and next thing a large otter surfaced and then dived into the turbulent mill race. Quite a special sight as there are probaly less than 2000 otters in England. Clearly in terms of managing the hazards of its territory the otter is very canny. The downfall in its numbers come from human risks which it can do nothing about. I became a devoted otter protector in a trice.

Handling money and flu transmission

Although I miss the Evening Standard newsellers in London, my all time favourite used to give me now and then a lobster or a brace of crabs caught from his lobster pots off Portland where he now lives, I recognise that if they have to be replaced by piles of free newspapers that this is a better time than most for it to happen.

How come? Well the Evening Standard was selling 250,000 copies 5 nights a week. Money changed hands each time, often the only time in the day that people handled money. If you want to spread influenza quickly it is a good way to do it. So perhaps the unintended consequence of the loss of Evening Standard newsellers is a slowing of the transmission of the H1N1 flu virus.

"Fashion is Risk"

The quote that provides the title of this blog comes from Sir Philip Green, the owner of Arcadia.
It is a good example of marketing as a risk management tool for upside risk. Fashion is about understanding and creating trends in the market place, about limiting the downside by not ordering too much stock , by offering at the right prices for the target market and by playing safe for at least part of a company's range when they are as big as the Arcadia Group.

But it is also about taking risks, like starting up in New York where Top Shop is a new, unknown name. How does Sir Philip mitigate the risk? By linking with Kate Moss who is a well known fashion icon in New York, by careful research as to what will sell at what prices and in what sizes and colours, by choosing a store in a great location so that it gets maximum visibility and by revving up the publicity machine.

Yes fashion is risk but a smart operator like Sir Philip knows how to manage the downside so he gets the upside benefit.

Suicide risk

France Telecom has experienced 24 suicides in the last 18 months amongst its 100,000 employees. Several of the employees have left notes blaming the company's culture change since it was privatised for their action.

The French put great store by solidarity with their fellow workers, far more so than in the UK. Yet the suicide rate was 17.6 per 100,000 people in France in 2005 (the latest date WHO data available on wikipedia) against the UK rate of 6.8 for a similarly sized population. In real lives this is a difference of over 6000 a year.

I do not have a simple answer for this difference.

Low tolerance of ambiguity

For those amongst us who have low tolerance of ambiguity, who are only really comfortable when they have certainty in their lives, petty rules are a great comfort. They take the place in a secular society of the religious certainties.

The recent story of two policewomen who were adjudged by Ofsted of having broken the law because they were taking turns looking after each others children is a case in point. The people at Ofsted appear to have abandoned discretion and common sense because they want certainty and the comfort that they cannot be blamed if something then happens to one of the children.

Fact is that by such rigidity they have been blamed for being petty. You have to learn to live with risks and to distinguish which are really important. It is not easy but it is very necessary.

Unremitting vigilance

We are currently in a lull regarding H1N1 influenza cases. Is the virus mutating and wilkl it come back as it did in 1918 far more virulent. No one knows for sure. In them meantime to paraphrase Margaret Chang of the WHO "Rather than blind panic or compacency in the face of the H1N! threat what is required in unremittiong vigilance.

The blunted edge

It was pointed out to me yesterday by a real estate agent from the Pacific North West that the US is taking its lead from Europe on sustainable building methods all because the penalties for developing new systems and products are far more severe in the US if they go wrong in some way. This threat of litigation is blunting the edge of innovation, the desire to take risks in new areas. It is as though they have signed up en masse to the Hippocratic oath - "above all do no harm".

View from the plinth

On Monday this week I went to Trafalgar Square to watch my friend, Lawrence Reed conduct his composition "The Ebb of Acrophobia" from the fourth plinth, the empty one. There was a "flash" orchestra summoned by Lawrence and the Internet of some 30 people, playing a wide variety of instruments and singing lustily when required.

Lawrence suffers from Acrophobia which is the fear of heights - a fear sometimes so intense that it sparks a panic attack. The music reflected his anxiety at being perched up on the plinth.

He risk managed the problem of standing up on the relatively narrow plinth and waving his arms around in order to conduct by sitting down in a camp chair and directing operations most expressively. In the course of the hour he had only one moment when he looked as if he was becoming apprehensive.

The consumption of alcohol after the performance by performers and onlookers was sufficient to alleviate any panic attacks brought on by height, some of us were almost horizontal .

The Liabilities for camera surveillance

With video camera surveillance comes liability. There are three liability issues to be considered.

1 Does the device create a false sense of security? Particularly important when dummy cameras have been used. Also it raises an expectation that the output is being monitored real time and that, in the event of an incident, remedial action will be swift. This could be an issue when school activities are being watched. Lack of attention by the operator, or not having an operator could create liability.
2 Is privacy being invaded? There are cultural norms at work here. Harrah's has cameras in its UK casino restrooms but not in its US ones, yet the drug and terrorist threats being monitored are relevant to both societies.
3 Is there a written policy that explains why video surveillance is needed and identifies how it will be used? If there is not then a challenge to its use may be hard to defend.

Michael Jackson and supply side risk

Michael Jackson was paid advance fees for his sold out concerts. His estate is estimated to be $400 million dollars in debt, so it is unlikely that AEG Live, the promoters, will be seeing any recovery from that, unless the posthumous sales of his back catalogue can provide the necessary boost to the bank account. The evidence to date is of only minimal insurance cover, because Jackson had a history of not making many of his promised appearances and his health was known to be suspect.

Whoever scheduled such a big series was clearly taking a significant risk. They had accurately determined the demand, but had failed to consider adequately the supply side risks. The contract between AEG Live and the artist will make interesting reading as to how certain risks were provided for. As for risk mitigation startegies ,will there be a series of memorial concerts which could fill the O2?

The pigeon's revenge

"Do you eat pigeon?" asked my dentist from Tipperary." They keep dentists in business, because the lead shot wrecks havoc on the molars."

Just one more risk to be aware of.

Diving risks

Carly Spencer,a very experienced diver, specialised in photographing wrecks on the ocean floor such as the Britannic liner in the Aegean, sunk by a mine in 1916. He also participated in medical trials and decompression tests run by universities in Europe and the US.

He commented on the risks that he faced,saying" I am not reckless, my wife and kids are the most important things in the world to me. But I do get a kick out of knowing that I am putting myself at the edge."

Sadly when filming the Britannic on May 24th he had an attack of the bends, which occur when divers come up from the depths too soon and nitrogen bubbles form in their blood. The attack was fatal.

Risks like deep sea diving require very, very strong discipline, extremely reliable equipment and close study of how currents may affect the divers.

The oldest Builder in Enlgand

The building trade has ever been subject to violent fluctations of supply and demand with many famous companies going to the wall when times got tough.

My favourite builder is a local one, Durtnell Ltd in Brasted Kent. It is a remarkable example of risk management over the centuries having been founded in 1591 and its first acknowledged building, Poundsbridge Manor, built for the Rector of Penshurst William Dartnall the father of the owner of the building company is still standing with a date on its front of 1593.

The company has its offices on land owned by the family since 1496 and is managed by three members from the 12th generation of Durtnell's to run the company. It has a staff of 170 and a turnover of £40,000,000 and as a building business specialises in high quality work.

It is the oldest builder in England and long may it prosper.

More "gai-atsu" please

Sometime ago I wrote about how "gai-atsu" outside pressure was often needed in Japan to get people to reach a consensus and that without such pressure, usually in the past from the US , nothing got agreed.

It showed up when Spitzer pressured the US brokers into revealing hidden commissions and now we see a fine specimen of "gai-atsu" in the British parliamentarians being forced to apologise and admit that the system of expenses that they have enjoyed so long is indefensible and a waste of public money. Have the revelations come officially from inside the House of Commons? No they have been leaked to the Daily Telegraph in greater scope and well before their agreed publication date.

The resultant "gai-atsu" from the general public who are clearly fed up with the freeloading has forced all parties to apologise. Yet they are still hoping to limit the damage and return to something resembling their old ways. Would that we could apply "gai-atsu" to MEPs' expenses who operate at an even higher level of obfuscation.

The Benefits of Practice

There has been a lot of coverage in the media regarding the H1N1 influenza and the possibility that it will soon be declared a pandemic. Some are questioning whether it is overdone.

From a medical prespective the new strain of flu seems relatively mild, from a business continuity perspective the world is having to mobilise its defences and watch the results of various initiatives, most notably what impact closing down Mexico for a week will have.

It is far too early to draw conclusions except to say that SARS helped to get people to take pandemics seriously and H1N1 will have the same effect, with the result that if it does mutate into something more lethal or when another strain comes along we will be better prepared to manage the situation so that it does not get out of control.

Do not underestimate the benefits of practice for emergencies.

Black spot for white horse?

Motorist don't just slow down and lose concentration when they see an accident site, they also gawp at landmarks and are advised by motoring authorities to pull off the road and then look, at the landmarks of course, not the accidents. Is the proposed White Horse of Kent going to create a traffic black spot?

Just in case you were wondering where you need to avert your gaze here is the BBC's list

The 10 most distracting landmarks in Britain
1. Stonehenge 2. Angel of the North 3. London Eye 4. Windsor Castle 5. Celtic Chalk Figures in Dorset 6. Wembley Stadium 7. Hadrian's Wall 8. Long Man of Willmington 9. Humber Bridge 10. The Wallace Monument

Bulk of the passengers

There has been a great deal of comment recently about the Ryanair proposal, following a poll of their passengers,to charge very fat people extra for flying if they overlap their seat Unfortunately this is not turning into the public relations disaster they deserve for pandering to their passengers' prejudice. They are getting publicity and not many are criticising them.

However their ploy is doubly cynical because not only are fat people an easy target, but also, as was explained on the BBC this morning, there is a perfectly well known example of how to manage this risk sensitively. South West Airlines in the US indicate that if you think you might not fit into a seat then you should consider buying the one next to you. In the event of the plane not being full then South West refund the cost of the extra ticket.

South West's approach is ethical and compassionate and a good example of thinking about the risks from the point of view of not just the majority but also of those unfortunate not to fit the seat space. They exhibit far better risk management than Ryanair.

Guns are bad news

I have never agreed with the statement from the National Rifle Association that "guns don't kill people, people kill people."

At the age of 11 ,when I edited the school magazine that I had founded, I was made aware by a poem that one of the other boys submitted for publication that guns came with problems. In praise of the benefits of using verse to get a message remembered I quote,

"Never, ever let a gun,
Pointed be at anyone.
Loaded or unloaded be
Matters not the least to me".

When at 18 I attended my first and only shoot, which was in South Africa with guinea fowl as the target, my very accomplished host lent me his over and under Japanese trap gun with no instruction whatsoever. Fortunately I decided that the aim was not to kill the birds, others were far more proficient at that, but to avoid killing the beaters or the other "guns". This I managed to do by only shooting straight up in the air and in that I was successful and the guinea fowl were shot by others in huge numbers.

Even knowing what you are doing around guns does not provide for complete protection from their malign influence. One of my colleagues was on the British Olympic shooting team which did not go to Moscow because Thatcher decreed that no British military personnel should go in protest at the Soviet invasion of Afghanistan. Another, much more tragically, worked as the plant manager for English China Clays in Middle Georgia where hunting is a very popular pastime. During a period of deep depression this delightful, thoughtful family man shot himself because the gun was downstairs in the garage
.
Guns are bad news.

Furry peril

Here is another example of unintended consequences reported by Kiwi Conservation:-

"Possums are not native to New Zealand. The first possums were brought to New Zealand in 1837 from Australia.Possums are native to Australia and are protected there.Possums are not a problem in Australia. Many trees in Australia have possum defenses such as spines, prickles or poisonous leaves.In New Zealand possums have no natural enemies.That is why possum numbers increased so fast. The possum is not protected in New Zealand, it is a pest.Most native New Zealand trees have yummy leaves and no possum defenses.The possum is doing a lot of damage to the native plants, animals and birds."

There are now 70 million possums in New Zealand.

Installed prematurely - a novel excuse

On April 8th I sent the following complaint

ComplaintsSubject: Road Traffic Safety

On March 8th 2009 I was crossing at 2.30pm Crutched Friars in the City, about 20 metres from where the junction with Lloyd’s Avenue is. Looking left to ensure there was no traffic coming, it being a one way road for vehicles I was almost run over by a bicycle coming from the right. My first reaction and that of the person with me was that the cyclist was in the wrong, but on observing the traffic layout there is an arrow and an island clearly allowing this direction of travel for cyclists. Having worked in the area for 10 years it was the first time that I had paid any attention to this because it never seemed relevant to any crossing decision I would make.

This is a very confusing arrangement for pedestrians, because it is so unusual and there is no reason to assume traffic is going to come from the right. In the event of a serious accident this could result in a corporate manslaughter charge against your planning department. There are far more pedestrians than cyclists in the City. I think you need to re-think this and any other streets with cyclists only access one way.

On April 15th I got this reply ( my italics)

I am sorry to hear of the incident on 8th March 2009. However, the cycling measures in Crutched Friars were installed prematurely by the contractor. Works at this location were stopped so that the issues can be discussed further. 'New' signs are still covered over.
Any cyclist using the street in the opposite direction to the traffic order and signs is currently liable for prosecution.
The Planning & Transportation Committee has resolved to review the introduction of the measures in Crutched Friars when it considers the results of the public consultation exercise on 7 similar schemes throughout the City. A thorough assessment of the proposed schemes has been undertaken using national guidance issued by the Department for Transport. Safety to all members of the public forms an integral part of that assessment. All these proposals will be re-assessed in the light of public and press reaction received and your concerns will be included in the report to the Planning & Transportation Committee.

Winning isn't everything

When a culture becomes too concerned with winning it can do some self destructive things and the damage is most often done by the middle managers or indiscipline amongst the staff.

Here are two examples from the last two weeks:-

* Maclaren Mercedes team telling lies to get an extra point in Formula 1.

* The Labour party apparatchiks cooking up a scheme to smear Conservative politicians in order to weaken their opponents.

The people who set the cultural tone, Ron Dennis at Maclaren for all those years and Gordon Brown, may claim that it was nothing to do with them - but they do not convince.

A risk by any other name

On April 1st the G20 protestors in London identified my friends at the Institute of Risk Management (IRM) as one of their targets along with the Bank of England, the Royal Bank of Scotland and the Climate Exchange. Fortunately in the event, the police kept them penned in for such a long time that they never got round to the the IRM.

Good thing too as the IRM is the training body for all types of risk management, public and private sector, but not the financial risk management the absence of which caused all the problems.

If their offices had been trashed it would have been the greatest case of mistaken identity since the diethylene glycol scandal when the Austrians added anti-freeze to their wines to make them sweeter and when the story leaked the Japanese stopped buying Australian wines.

Pensioner risk

Two recent cases indicate that age is no bar for criminal activity and indeed the older you are the more likely the scam will be highly skilled and contain some thinking outside the box.

First there was the group led by a 71 year old who managed to sell a property they didn't own to the Candy brothers, two of the most active property developers in London, for several million pounds.

Then the £5 million banknote forgery carried out in the front room of an 83 year old's home. The results were so good that only the ink and the paper gave them away, it was reported. They believed in doing things in some style, the only time the gang met up was in Claridges. It is not recorded whether they paid in dud notes or not.

Whilst these show commendable initiative and no desire for early retirement and may, for all I know be the tip of an iceberg of geriatric crime, there is only one thing seriously wrong with these activities, besides the obvious one that they are illegal- the criminals in question got caught and have been sentenced to spend several of their dwindling years in prison. There is something in having too much form perhaps.

Stauffenberg's heir

Colonel Claus von Stauffenberg limited the details of his assassination plot of July 20th 1944 to a very small group in order to protect those who sympathised with him in the event Hitler was not killed and in the hope that they would carry on with his mission to make peace and restore the integrity of the German Army.

On learning of the failure of the plot, one of those sympathisers, Stauffenberg's good friend and fellow staff officer, Johann Adolf Graf von Kielmansegg, rushed back to his apartment. There he and his wife had to decide very quickly whether to destroy the evidence of their knowledge of Stauffenberg's intentions or whether they should keep some documents to prove they were not Nazi sympathisers to the advancing Allies. The threat of a visit from the Gestapo concentrated their minds and they set about tearing up and flushing the documents they had down the lavatory. The repeated noise of the cistern filling and flushing drove their neighbours to hammer on the ceiling in annoyance.

They had made the right decision because the next day the Gestapo arrived , interrogated von Kilemansegg for several days and held him for 2 months whilst trying to make a case against him. Eventually he was released back, not to a staff position, but into active duty and served on the western front in a panzer division until his capture by the Americans.

In 1950, he was asked to serve as the secretary of a committee planning the framework for a new German Army, the Bundeswehr. In due course he became a general and finally in 1963 he was made NATO Commander Land Forces with 500,000 German, American and British troops under his command. He strongly supported the democratisation of the German Army and its legitimate control by the government. He retired, liked and respected in 1968 and died in 2006 aged 99. Through him and others like him Stauffenberg's hopes for the restoration of the German Army's integrity were significantly realised.

The night shift

The recent report that working a night shift may put you at greater risk of breast cancer will probably require more research before the link is firmly established, if ever. However having managed three companies which had a night shift I can say that if I could have eliminated the night shift I would have. It is the most undisciplined shift, the one when the mistakes are made and product quality suffers. The communictaion with the day shifts is often poor and adds to the confusion. The workers have domestic problems from working when their families are sleeping which adds to the difficulties they face.

If a link is proven then will all night shift workers who develop cancers be able to claim for an industrial disease, despite the fact that they are paid a higher rate for the inconvenience of working nights.? The case of Denmark where compensation for those with breast cancer has been paid could be the shape of things to come across the industrial world, with implications for workers' compensation insurance. This could be a very, very big iceberg.

The mouse behind the curtain

Having an mid morning meeting in one of the railway hotels in London, I look behind me at the window sill and see a mouse walk out from behind the curtain, sniff around, cool as you please, almost Beatrix Potteresque in its audacity, and then disappear.

They say that the explosion of rubbish has meant an equivalent increase in the rodent population with all the risks that brings with it. Clearly ratcachers will be in demand even in a recession, but will we be cutting back on rubbish collection because of the state of government finances?

"The long run has run away"

At the time of writing my January 21st blog advising of Peter Bernstein's 90th birthday I also sent an email to the Editor of the Financial Times drawing attention to the great man's anniversary and suggesting that they get him to write something on the present economic situation.

The FT did not reply,there was nothing to reply to I suppose, but in today's issue there is indeed an article by Peter making the point that the long run is a misleading guide to investors, in his view it has always beentoo unknown for it to have any value and that its demise is to be welcomed because it will always be an impenetrable mystery.

Centuries of risk management

An educational trust, started in 1748, with current reserves of £50,000,000 and an annual disbursement of £1.3 million must be doing something right.

Interesting that when the founder, Sir John Cass, died, his will was not complete and it took 30 years of legal wrangling before the trust was established. It has supported and continues to invest in schools and education requirements for individuals in the City and the east End of London and in 2003 was a major benefactor for the establishment of the Cass Business School.

Over such a long time and with many different trustees the opportunities for feckless or reckless investment decisions would have been considerable, so the success and continuing existence of the Sir John Cass Foundation says a great deal about the wisdom with which the original trust was established and the care with which it has been administered. Human beings do not always have to be ruled by markets.

Sir John Cass's birthday in February 20th. He was born in 1661.

At least equal stature with the trading desk

Yesterday in the FT, from an article on risk by Lloyd Blankfein, Chief Executive of Goldman Sachs

"Risk and control functions need to be completely independent from the business units. And clarity as to whom risk and control managers report to is crucial to maintaining that independence. Equally important, risk managers need to have at least equal stature with their counterparts on the trading desk: if there is a question about the value of a position or a disagreement about a risk limit, the risk manager's view should always prevail."



Now today we have a report in the Timesonline which shows that HBOS had been warned by Mr. Moore, their Risk Officer between 2002 and 2004, who had then been sacked and replaced by someone with no risk experience. The Times report goes on:

"Mr Moore, a former KPMG financial services expert, said in a previous interview that HBOS had been chasing sales too aggressively and with little regard for risk as early as 2002.
In his written submission to the Select Committee Mr Moore said: “I signed a gagging order at the time in our settlement agreement.”

Mr Moore gave an interview to the BBC in October criticising the approach to risk taken by HBOS.
"I think a concern everybody had [was] whether or not the business was under control," he said, claiming that the bank's priority was switched from risk management to growth under the former chief executive Sir James Crosby, who was subsequently appointed by the Government to lead a review of the mortgage market.
"The retail bank was going at breakneck speed and an internal risk and compliance function feels like a man in a rowing boat trying to slow down an oil tanker. I'm not saying that there were any bad intentions in that but it was difficult to slow things down," Mr Moore said. "

So there you have it - unless the Risk Officers have the clout and the support of the CEO, and the CEO has the support of his shareholders ( not a problem for Goldman Sachs) the momentum that builds up is hard to manage. Perhaps Risk Officers should also have to report directly to the FSA to justify their decisions and to provide more rigour and support in what can be a very lonely and unpopular role.

Innovator liability

Imagine you have created a pharmaceutical drug which, after lengthy testing you spend money on marketing and explaining to doctors what the benefits and side effects are and they come to rely on your information. You pass all the FDA tests and start making sales and then when your patents expire you are faced with competition from manufacturers who supply generic drugs. Tough, but that is the way of the world, no one gets an intellectual monopoly forever.

Now imagine that one of the customers for the generic drug sues the manufacturer and your company because of the side effects. Does the Court find against the manfucturer and decide that your company is not culpable?

In a recent case a court in California has decided that you, as the Innovator, are culpable, and the generic manufacturer is not.

The court stated:
"The common law duty to use due care owed by a name-brand prescription drug manufacturer when providing product warnings extends not only to consumers of its own product, but also to those whose doctors foreseeably rely on the name-brand manufacturer's product information when prescribing a medication, even if the prescription is filled with the generic version of the prescribed drug. "

As lawyers Mayer Brown LLP explain one of the consequences of the court's decision is that it " threatens to create an insurance system under which name brand manufacturers absorb the liability of their competitors: competitors that, in many instances, not only enjoy greater market share, but are also relieved of research, development and advertising costs. This system, in turn, threatens to drive up the costs associated with the development and marketing of new drugs, which could chill innovation of new products and undermine the policy goal of preventing future injury to patients. "


This would make generic drug manufacturer even more attractive as insurance costs would be reduced. Perhaps generic drug manafacturers should be made pay for the insurance of the innovator as they are clearly getting a benefit. Don't hold you breath though.

Hoax exposed - one less risk

It has just come to light that a painful condition called " cello scrotum" that was supposed to affect male cellists and which was written up in the British Medical Journal in 1974 was a hoax. The author was Dr, now Baroness, Elaine Murphy who did it as a riposte to what she saw as another spoof medical condition " guitar nipple" which had been reported in the BMJ.

It is only recently when she saw that the condition was being referenced by other researchers that she decided to come clean. At least one risk manager I know used to show a photograph of a cellist in his presentations and ask his audience to identify the risk.

So there's one risk that risk managers of orchestras will be able to discount. Did male cellists take out insurance cover and if so were there any claims? Were any dissuaded from taking up the instrument and have the sales of cellos been depressed as a result? What other diseases are spoofs? The mind boggles.

Airhead

Great letter in today's FTonline from Takashi Ito pointing out that John Thain, late of Merrill, late of Bank of America is a prime example of the Japanese phrase "kuuki-yomenai" or KY for short.

KY means "cannot read the air " , the nearest English phrase is perhaps "not knowing which way the wind is blowing", but that doesn't quite capture the willful disregard of what is happening to others and the refusal to accept any blame. KY seems an addition, like schadenfreude, to our range of expressions.

John Thain, buying $1064 waste paper baskets, spending over $1 million on an office re-design, arranging for his staff to get million dollar bonuses at this time of global belt tightening and when Merrill was just about to announce a $15 billion loss, is not alone in his inability, Sir Fred Godwin is reported to have argued fiercely to be compensated for loss of office.

This total focus on self reminds me of Leona Hemsley's comment "I don't pay taxes, only little people pay taxes."

The Athenians used to have a vote, written on clay tablets, ostrakos, on whether to send into exile those people who had become too arrogant and powerful to be retained in the city. Perhaps we should bring back ostracism as the punishment for those who cannot read the air.

Risk above the parapet

In the blog " Tomorrow is another day" on January21st the point was made as to how difficult it is to change a flawed business model when it is delivering good returns. In the January 24th-30th 2009 edition of the Economist, in its special report on the future of finance there is the following scenario set forth by Andrew Lo, professor at MIT Sloan School of Management :-

"Imagine a confrontation in 2004 between the head of Lehman and its chief risk officer. Foreseeing a catastrophe ahead the risk officer proposes shutting down the mortgage business, but his boss threatens to sack him on the spot. He suggests cutting back, but his boss counters that his competitors are expanding and his best people would be poached. He mentions hedging the risk, but his boss retorts that in the next two years that will cost hundreds of millions of dollars in lost profits."

The Economist goes on to point out that the risk officer's analysis would be hard for all but partnerships and private companies. Perhaps that is where the best risk management will come from in future.

Recession - Depression

Depression is a disease which has its own risk indicators. One of them is stress and another is unreasonable perfectionsim. As a result commercial lawyers are particularly at risk.

Matthew Johnstone, who suffers from depression himself, has written and illustrated two books on the subject - "I had a black Dog" and Living with a Black Dog" - which give immediate insights into the condition.

Let us now praise famous men

Tomorrow, January 22nd is Peter L. Bernstein's 90th birthday.

Peter is the doyen of writers on risk. His book ," Against the Gods" the remarkable story of risk, published in 1996 is the best on the subject. If you haven't read it yet then you should,whether or not you are in financial services. Towards the end he makes the following observation;

"Finally, the science of risk management sometimes creates new risks even as it brings the old risks under control. Our faith in risk management encourages us to take risks we would not otherwise take. On most counts that is beneficial, but we must be wary of of adding to the amount of risk in the system.... Derivative financial instruments designed as hedges have tempted investors to transform them into speculative vehicles with sleigh-rides for payoffs and involving risks that no corporate risk manager should contemplate."

Happy Birthday Peter.

Tomorrow is another day

One of the greatest difficulties a CEO can face is inheriting a company with a morally flawed model, a model which requires chicanery and exploitation to derive a signficant proportion of its profits.

It is well nigh impossible when things seem to be successful for the CEO to change the business model to one which no longer has the dishonest profitable thread running through it. Colleagues will not be persuaded as it affects their bonuses nor will the majority of the shareholders .

It is only when outside forces, what the Japanese call gai-atsu( foreign pressure), become strong enough that change can take place. Such was the case of the insurance broking industry when Eliot Spitzer confronted them over undisclosed commissions, such is the case of the banks with the unravelling of their subprime mortgage investments as the credit crunch unpicks their trust.

Even more pertinently Lincoln's election as US President and his refusal to sanction slavery put the entire Southern States economy, responsible for 57% of exports from the USA, into a position where the business model could only be preserved through secession. The economy based on slavery has been incomparably the most expensive in human lives and wealth to eradicate.

It fell off the back of a lorry

One of the issues being brought to light by the reporting on the alleged Madoff fraud is that some of the investors recognised that the returns were too good to be true, but rationalised their continued participation on the grounds that Madoff was probably using insider dealing ( illegal of course) to achieve them. Rather akin to buying luxury goods which might have been stolen and then discovering they were fake.

WANTED - Risk Manager for 2009

Criteria:

• Able to walk on water when taking off on a new project.
• Works hard to get traction whilst appearing calm on the surface.
• Ability to dive into murky details essential.
• Own carbon neutral transport a plus.
• Suitably equipped to deal summarily with plagues of black swans.
• Resolute - never ducks risk.
  

May you make 2009 what you want of it.


David Gamble
Risk Publishing Online

www.riskrisk.com