Thursday, 26 February 2009

"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.

Monday, 16 February 2009

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.

Tuesday, 10 February 2009

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.

Friday, 6 February 2009

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.