Risk Risk

New Year's glass half empty

2011-01-01T11:26:00.003Z

New Year is a good time to note that optimists see the hour glass is half empty. There is still time for more experiences written in sand.

Boxing clever

2010-10-27T06:46:00.001+01:00

What is the best ratio of thoughts outside the box to ticks within?

Safe work is the door to all work

2010-02-11T11:02:00.004Z

The Toyota mantra is "Safe work, reliable work, skilled work. Safe work is the door to all work. Let us pass through this door first."

As a simple expression of a risk management philosophy which all workers can understand it has worked well until the wheels started metaphorically coming off the Toyota juggernaut.

Some Toyota workers consider that the recalls are down to having recruited people who do not have the Toyota work ethic, but the recall problems are not the result of shoddy workmanship which would be rectified by recalling batches made by a particular shift in a plant. The problems are rather a matter of design. Some of the design problems are down to the enthusiasm with which Toyota cuts costs, an approach which, unless the emphasis on safe work is maintained can compromise the vehicles' safety and this appears to be what has happened with the jammed accelerators. The fix could have been designed in and is now having to be laboriously and expensively retrofitted. "Just in time" needs also to take into account "just in case".

The design problems with the hybrid cars are different. This is new technology and as it develops there will be problems or perception of problems which will need to be addressed. Toyota's reputation has been severely damaged by all these problems across their range coming together at the same time. There is now a view that all Toyota cars are suspect, which knocks the second hand market and the demand for its new cars too. Nothing that Toyota has said to date has calmed the concerns. They need to get back to their mantra.

No-win, no-fee, no-help

2010-02-02T18:12:00.004Z

It so happens that a Society which I am involved with is arranging a coach trip for 50 people, many of them elderly, in June.

I have asked the coach company for their insurance details and I thought I would check out whether the no-win, no-fee accident lawyers could give me any advice as to what other practical steps I should take in order to be able to meet any claims should they occur. Twice I phoned one of the longest established companies and in both cases I was told that this was not their role and the line was cut very quickly.

I, of course will be working to ensure that no accidents happen, but I can now see that the no -win no-fee people are , as I always suspected, no-help.

Another nail in the coffin of the Japanes orange grower

2010-01-26T20:06:00.003Z

Japanese TV reported today that over the last decade the consumption of satsuma style oranges has dropped from 300 per person per year to 150 per person per year with the result that Japanese growers are facing financial hardship.

The cause of the reduction is partly the change in the ways people socialise. Previously they would gather in the winter around a warm central point, often a hole in the floor with a heater over which a table was arranged and talk and eat statsumas and watch television. Now they get out more.

The other culprit is fashion. Japanese girls are wearing longer nails and longer nails are just no good for peeling satsumas. Seems that the boys are too pathetic to do their own peeling. These are the steps down which a once great culture stumbles to oblivion.

A rare sight

2009-12-07T17:32:00.003Z

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

2009-10-21T17:39:00.004+01:00

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"

2009-10-14T09:43:00.002+01:00

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

2009-10-05T15:43:00.003+01:00

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

2009-09-29T05:17:00.002+01:00

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

2009-09-03T20:01:00.002+01:00

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

2009-08-14T13:32:00.002+01:00

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

2009-07-16T12:41:00.004+01:00

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

2009-07-14T13:06:00.004+01:00

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

2009-06-29T14:48:00.003+01:00

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

2009-06-13T07:40:00.003+01:00

"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

2009-05-29T09:35:00.003+01:00

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

2009-05-17T18:15:00.003+01:00

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

2009-05-11T20:46:00.005+01:00

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

2009-05-06T16:12:00.004+01:00

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?

2009-04-25T18:45:00.004+01:00

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

2009-04-24T09:15:00.004+01:00

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

2009-04-21T18:51:00.004+01:00

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

2009-04-21T09:57:00.004+01:00

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

2009-04-15T16:20:00.004+01:00

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

2009-04-13T14:40:00.004+01:00

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

2009-04-02T22:14:00.005+01:00

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

2009-03-27T18:36:00.003Z

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

2009-03-23T08:52:00.003Z

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

2009-03-16T20:19:00.008Z

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

2009-03-10T15:54:00.003Z

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"

2009-02-26T11:35:00.003Z

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

2009-02-16T10:06:00.005Z

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

2009-02-10T15:41:00.007Z

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

2009-02-06T14:58:00.005Z

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

2009-01-28T12:47:00.006Z

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

2009-01-27T15:59:00.005Z

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

2009-01-26T14:35:00.003Z

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

2009-01-23T11:24:00.003Z

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

2009-01-21T10:37:00.005Z

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

2009-01-19T17:30:00.004Z

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

2009-01-12T20:00:00.002Z

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

2009-01-05T12:41:00.002Z

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

Bad number to end 2008 with

2008-12-30T17:18:00.002Z

The Japanese stockmarket has closed out the year 42% down.

42 is a very bad luck number in Japan as in Japanese it is Shi Ni which also means death.

Fortunately risk managers are not superstitious.

A headache in the making?

2008-12-30T12:17:00.004Z

There is a report on Bloomberg today that Rhodia, the French pharmaceutical company is closing down the last paracetamol factory in Europe, unable to match the prices of Chinese and Indian product.

The checks on the overseas factories are apparently fairly frequent and rigorous so that's alright then, or is it?

We wouldn't feel comfortable having all baby milk production based in China at present, we would want a reliable alternative probably based in Europe. The pressures on factories to cut costs can result in all sorts of quality issues and somewhere in the supply chain there could be a rogue company supplying a number of producers. The drug retailers are no longer willing to pay a premium for paracetamol from a plant with decades of contamination free production. The consumer is not getting a choice, but is taking the risk, unlikely though it may be, of ingesting something toxic. Many would be willing to pay more to avoid this.

Paracetamol is widely used by millions of people each year, if there is ever a major product recall because of contamination it will create panic as there may be no suitably trustworthy substitute available in the volume required.

This is one headache we should seek to avoid. Keep a stock of US made paracetamol to hand.

Kimche and Christmas

2008-12-28T09:34:00.005Z

On Christmas Day the risks are all well known and there is a process in place to manage them in most households. The turkey has been bought, the oven is working, the guests have arrived, what could possibly go wrong?

This Christmas morning just passed I happened upon one of those low probability high impact risks which could create havoc. Opening one of the cupboards I came on a pack of kimche brought by my son for New Year with the instructions " keep refrigerated". As it was at ambient temperature it had started to ferment and the bag was puffed up like a balloon. I gingerly carried it outside and duly puctured the bag which produced a singularly revolting smell of fermented garlic. Imagine if it had exploded during Christmas lunch - we would have had to evacuate the house!

Market reacts badly to deleverage risk

2008-12-16T17:46:00.002Z

When risks are poorly understood and therefore even more poorly communicated – markets can get hold of the wrong end of the stick and PANIC.

Replacing toilet paper

2008-12-14T10:22:00.003Z

A report in a US newspaper mentioned that the demand for satellite base stations was so constant it was like toilet paper - something that will always be required.

But not even toilet paper has a permament market demand. Every new home and every hotel room in Japan now comes equipped with plumbed in toilet seats which replace toilet paper with water and a blast of hot air.

Moral hazard and statistics

2008-12-14T07:42:00.005Z

For statistics to have any value for decisionmaking they need to be verified and checked for consistency and accuracy.

It is heartening to see Sir Michael Scholar, the head of the new statistics authority, rapping the Government's knuckles for overriding the concerns of the National Statistician and her staff and publishing unverified statistics for the decline of knife crime.

There is a lot of moral hazard in this area for politicians. They can select the statistics which suit their case, knowing that even a rebuke from Sir Michael will go unreported by the tabloids because it is all far too technical. The risk is that public confidence is further eroded in Government statistics - Sir Michael needs a regular platform, probably on the BBC where he can explain the use and abuse of statistics. Then the public will wise up to this kind of chicanery.

Do it at home.

2008-12-12T15:50:00.005Z

Continuining the theme of Japanese risk management there are moments when the micro-management tendencies in Japanese life start to grate.

There is sense is setting out angled lines on narrow platforms to encourage orderly queues three abreast and something that London underground should consider. However the posters suggesting that people pay attention when walking and texting because their line of sight is curtailed seem rather excessive, unless there are lots of manholes left uncovered, which there aren't.

Most Japanese of all was a large poster displayed prominently at many of the subway stations in Tokyo which showed a drunk salaryman ( office worker) lying across several seats on a train having just vomited . The message is "Don't do it on the train, Do it at home". This does not seem to support family values and is just an example of trying to sweep the problem under the tatami.

Gullible grannies

2008-12-05T00:29:00.006Z

There has been a 60 minute documentary on Japanese morning TV to educate Japanese grandmothers on the dangers of a telephone scam. The con artists dial at random and just by saying "Hello it's me" persuade elderly women that they are talking to their grandson. They then tell her that they are in trouble with their company and need money,usually around Yen 4 million (Stg 30,000 at present exchange rates) or face the sack. They give details of where the money should be sent.

Despite checks at the banks where they try to explain that this is a scam the grandmothers have parted with over Yen 14,200,000,000 (over Stg 100 million) this year alone. The TV progamme is yet another way of trying to protect them from this scam. It is doubtful that it will have much impact.

Blogs and senile dementia

2008-11-27T00:08:00.005Z

With very large numbers of people living beyond the age of 80 the Japanese have a series of initiatives designed to reduce the incidence of senile dementia. Besides the community clubs for the elderly they also have a Silver Centres which supply 70+ aged workers for jobs such as tidying up the roadside verges or clearing out streams . Japanese society does not have the charity culture of the UK which provides so many people with a worthwhile voluntary activity, nor, in the cities does it have allotments.

There are daytime television programmes dedicated to exercises for the aged and you will have seen the adverts for Japanese computer games to exercise your mind on a daily basis. These are yet other examples of how the Japanese are tackling the risk of senile dementia. Me, I write a blog.

A sign of age

2008-11-25T12:03:00.005Z

Drivers in Japan from their 75th birthday need to display a momiji (Japanese maple leaf) sign of autumnal red and gold on the windscreen or on the back of the car whenever they get behind the wheel. There is no rule as to where the sign should be put which means that it can get overlooked. Presumably the thinking is that, like learners, elderly drivers need to be identified so that the other road users will drive more defensively. There will come a time if it hasn't already when momiji signs considerably outnumber learner signs as the elderly have perhaps 15 to 20 years to display whilst learners are usually finished within six months.

As the display of these signs will be soon compulsory it will be interesting to see if "age discrimination" issues arise or whether insurance is declared invalid if an elderly person has an accident when no momoji sign is displayed.

After 75 no one fails a driving test

2008-11-24T08:38:00.006Z

Awaji Island, where I am currently staying, is linked by very grand bridges to the main Japanese island Honshu in the North and one of the three other main islands , Shikoku in the South. This rural area is famous for its onions and chrysanthemums. It has a slowly declining population, first because like the urban areas of Japan the birth rate is below replacement level, but also because many young people do not want to be farmers and leave for the bright lights of Kobe and Osaka.

The small population of Awaji and its relative isolation until the bridges came means that there are no railways and in most areas only three buses a day. This means that old people have to drive if they want to go anywhere.

In Japan you have to take a driving test every 3 years from the age of 75. In Awaji those about to be tested are told that "no one fails"! Those who have had so many accidents that they can no longer get insurance have the government as insurer of last resort. There are no convictions for dangerous driving such as facing your friend in the passenger seat whilst driving on the wrong side of the road. As Awaji people drive rather slowly, 40 mph is really going some, it appears that the accidents that occur are not usually severe. However there are almost no pavements in the villages and the chances of being run down would be high except that when they see you walking ( I have done 11 kilometres in the last 2 days) the drivers cross into the other side of the road if there is nothing coming.

In many ways this deliberate fudging by the authorities is a humane response to the difficulties old people face in getting about. It will be allowed until someone runs over a school party and then the authorities will start enforcing proper tests. Maybe there should be silver roads where super senior citizens can drive, knowing that the risks to children have been properly accounted for.

Some 80 year olds still have mothers

2008-11-24T08:12:00.006Z

In Kobe, last Saturday, where I am visiting with my wife, 4 of the 9 dinner guests, all aged over 60, had mothers still living. Amazingly not one but two of them, one aged 80, have mothers aged over 100. The other two mothers are 94 and 90 next January (this last is my mother ). The only other Brit present lost his mother when she was 98, so we represented at that table the future, not just of Japan but probably of all developed societies.

As I travel around Japan over the next two weeks I shall be looking for examples of how Japanese society, the world leader in the number and percentage of senior citizens, is managing its aged population risks. The Japanese joke that once someone gets to 90 they forget how to die.

One hand is better than two.

2008-11-19T15:00:00.003Z

Following on from the Nansen blog and hearkening back to an earlier one about Will Rogers I came across the following pithy bit of advice in Anne Fadiman's marvellous little book " ex libris", culled from a naval manual ,

"Do not touch cold metal with moist bare hands.If you should inadvertently stick a hand to cold metal, urinate on the metal to warm it and save some inches of skin.If you stick both hands,you'd better bring a friend along."

Nansen and the Polar risks

2008-11-17T12:36:00.008Z

Great programme last night on Nansen's voyage in his ship,the Fram, in an effort to reach the North Pole by using the movement of the Polar ice cap to ferry them there. The voyage started in 1893 and was completed over 3 years later .

The attempt was full of wonderfully inventive risk management ideas - the Fram was designed so that the pressure of the ice would, instead of squeezing it until it cracked, push it up and out on top of the ice. There was a wind driven propellor mounted on the mast to produce electricity. The food was varied which contributed to the health of the crew and helped relieve the monotony of the Arctic nights. Nansen had studied how the Inuit survived in the Arctic and used their techniques of building a shelter when he and a single companion had attempted to make it by dog sled to the North Pole. They turned their sleds into kayaks when, realising they were being taken away from the Pole by the movement of the ice ,they turned their attention to finding a way back, not to the Fram whose position after several weeks of ice movement was completely unknown to them' but to the nearest inhabited island.

Three and a half years after the Fram set out Nansen and all his companions returned safe, having made numerous important discoveries, including the existence of a deep ocean under the polar ice cap, but yet unable to claim the title of first men to the North Pole.

Truly the Norwegians were the pre-eminent risk managers of polar exploration.

Here is the map of Nansen's voyage.
http://www.fram.museum.no/en/default.asp?page=142

90 years on

2008-11-11T16:28:00.003Z

On this day, Armistice Day, the 90th anniversary of the ending of the first World War watching Henry Allingham at 112 laying his wreath at the Cenotaph the final words of King Lear came to mind

"The oldest hath borne most: we that are young,
Shall never see so much, nor live so long."

Florence Nightingale sets the standard for ERM

2008-11-07T16:12:00.006Z

On Tuesday this week I went to the Florence Nightingale Museum, just across Westminster Bridge from the Houses of Parliament, tucked behind St Thomas' Hospital to view their archives which they very generously made available.

FN didn't go in for snappy titles but her "Notes on matters affecting the Health,Efficiency, and hospital administration of the British Army" packs many punches that a tabloid editor would relish. Some she borrowed

"If you don't send shoes, the army can't march." Wellington.

Some she coined herself

" But habit and ignorance make all men in all professions wonderfully acquiescent in evils, which, if once known and felt are remediable."

What comes across is that no detail relating to her subject was too small to be considered and then improvements proposed. In three hours of reading I noted her observations and proposals on sanitation, barracks and hospital construction, ventilation,statistics' use and veracity, medical education, clothing and equipment, laundries, procurement, diet, cooking facilities ( bread should be baked by the regiment), recreation and discipline, sick transport,climatic considerations, finance, malingering ( there isn't any to speak of), soldiers' wives and their treatment, the need to remit soldiers' pay home and then, as you would expect, proposals for nurses and their training.

There really was nothing that escaped her eye, except perhaps mental health issues and probably that is covered in another volume. If you want to understand how thorough enterprise risk management could be you need look no farther than this book.

Cleaning up anthrax

2008-11-03T15:21:00.005Z

The tragic death of a drum maker from anthrax, reported on today's news, raises the issue of who is qualified to decontaminate the site.

Probably in this case someone from the Porton Down laboratories will be given the job. In the event of a major outbreak of anthrax or an equivalently nasty disease then the public authorities would be very stretched. There are a few private experts and if you had need of one then Jeff Charlton at http://www.999team.org/ is among the best. No I am not on a retainer, but this kind of capability deserves wider recognition.

A day to remember

2008-10-27T14:13:00.003Z

October 27th is the anniversary of Vasili Arkhipov's intervention that prevented a Soviet submarine firing nuclear torpedos at a US destroyer at the height of the Cuban missile crisis. Raise a glass in remembrance of a very gallant officer.

Regulation

2008-10-21T08:14:00.006+01:00

The Americans are busily searching for the culprits of the financial meltdown and the SEC, FBI and others are beating the bushes, but in the UK the heads of the Bank of England, the FSA and the Government make speeches - various people from the Bank of England and the FSA are moving on, but it is safe to predict that no one will be found to be responsible except, of course, the bankers and hedge funds. It is fortunate for them that burning at the stake is out of fashion.

Lloyd's of London has had some experience of failed regulation and after the failure to recognize the imbecilic behaviour of a lunatic fringe, major reconstruction became necessary (without any contribution from the taxpayer). After this near death experience Lloyd's passed hundreds of new regulations and imported herds of regulators - there were more at Lloyd's than were considered necessary for the rest of the UK insurance industry - with dire consequences. The market again sustained many billions of losses but since corporate capital had arrived and the losses were overwhelmingly sustained by this capital rather than the Names, it did not attract much notice However, it was obvious that the legions of regulators were ineffectual and the missing key component was knowledge, which was in short supply, not power, which they had in abundance.

The current Franchise Board at Lloyd’s was created in response to this so that now regulation is firmly practitioner led. The Franchise Board came to power in a fast improving market environment but the current signs are promising: it has the power and the knowledge.

It is not clear that the Bank of England or the FSA really understood the nature of the risks which financial institutions were accepting or, if they did, that they had any clue what to do about them. The new regulations and armies of new regulators which will arrive on the scene as a response to current events will be similarly handicapped. Unless the regulators are really up to speed with what the markets are doing they will prove to be as ineffectual as before.

History – In 1929 the Willcox Syndicate at Lloyd’s insured the solvency of secondhand car dealers – with predictable results. Lloyd’s, thereafter, insisted that all businesses operating in Lloyd’s should agree not to accept Financial Guarantee risks. This interdiction has been slightly modified since but is still in force – some people do learn from history.

Thou shalt not underwrite financial instruments

2008-10-20T22:29:00.005+01:00

A very knowledgeable friend remarked last week that ever since the 1920's when one Lloyd's syndicate caught a severe cold insuring some financial instruments which went badly wrong ,not to underwrite such has been one of the commandments which all Lloyd's underwriters must very consciously obey.

Not in front of the children

2008-10-17T16:04:00.005+01:00

Blue Peter, the children's television programme, has celebrated its 50th anniversary this week. During this half century its presenters have climbed up Nelson's Column, jumped out of aircraft, gone into ice pot holes, caressed pythons in the studio and exposed themselves to all mannner of dangers. Unless I have missed something, which is quite possible because I have never been a regular viewer even when my children were of the appropriate age, there has never been a fatality connected with any of the myriad of stunts that they have done. Says something for the BBC's risk management - I wonder if Blue Peter were the orginator of the famous risk advice " Don't try this at home."

Risk Management and Pay

2008-10-17T15:55:00.001+01:00

"If [remuneration] policies are not aligned with sound risk management, that is unacceptable. Immediate action will be required to change the policies".

FSA, 13 October 2008

Long term survivor

2008-10-10T11:51:00.008+01:00

Some years ago, to celebrate an anniversary, I decided to plant a tree.

I chose a Ginkgo Biloba, which are to be found all over Japan and whose nuts when fried are delicious. They have a downside in that in season the females can be quite pungent so I have planted the tree well away from the house and close to the fence, so it will create a problem for any new neighbours if the farmer ever develops his fields for housing.

Not only is the tree fruitful, and very beautiful, particularly in Autumn when its leaves change to bright yellow, but also it is an example of one of the great survivors in nature, for there were ginkgo biloba trees growing over 270 million years ago when the dinosours were around. Some individual specimens can live to more than 3000 years; there are some ginkgos still living which were only 1-2 kilometres from ground zero in Hiroshima.

It seemed to me that anything that could survive the vicissitudes of such a long period would be a good bet against whatever climate change could come up with. It also appears in today's newspapers that ginkgo extract halts the onset of alzheimers - good risk management all round.

High Impact, low probability risk

2008-10-09T06:17:00.007+01:00

For more than 10 years the Council of the Association of Insurance and Risk Managers ( AIRMIC) have insisted that their reserves be placed with three separate banks, despite their lead bank offering significantly better interest rates. An example of risk managing for what, for the last ten years, would have been seen as a high impact but low probability risk.

Who decides on the risk?

2008-10-03T13:55:00.005+01:00

A Chief Executive and his Chief Financial Officer, faced with a deteriorating situation in their markets, decide on a drastic course of action, supported by their banker.

Under their governance rules they submit their plan to the risk management committees. The first risk management commitee, having talked through the proposals with the stakeholders refuses to support the plan, which almost causes an apoplectic fit from the Chief Financial Officer who is not used to such detailed risk management consideration of his proposals.

The second risk management committee, composed somewhat differently, then refines the plan, adds some additional controls and benefits and confirms their agreement with it.

It then remains for the first risk management committee to decide whether their concerns and those of the stakeholders have been sufficiently addressed.

Is this a model for future corporate governance and for putting the risk manager right in the centre of the risk management process at the point of the decision?

Spreading the risk

2008-10-01T10:13:00.004+01:00

Here's a risk management story from Tom Cahill's report on Bloomberg today;

"John James, who runs the Chicago-based firm with $25 million of assets, didn't buy Lehman stock or debt. Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds. He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on Sept. 15. "

Never rely on just one provider, if you can help it.

Pass the radioactive parcel

2008-09-29T19:20:00.006+01:00

The ATCA thought piece today quoted the world derivatives' market at $1.14 quadrillion ( that a thousand trillion ) which equates to $190,000 for every person on the planet or 22 times the global GDP.

The unravelling ( unwinding seems far too controlled a word) of such a large market which is based on nothing more than confidence starts to look like a radioactive version of pass the parcel, whereby everyone involved is blighted. Don't expect your $190,000 soon.

Wholely right

2008-09-22T13:35:00.004+01:00

The following extract from Berkshire Hathaway's 2002 Annual Letter to Shareholders deserves the widest possible circulation. Warren Buffett should be required reading for all in the risk business. I have not abbreviated the extract - you need to read the whole section.

Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.

Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.

Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.

Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.

The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it
seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.

When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.

But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.

Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.

Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.

Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

Of course, both internal and outside auditors review the numbers, but that’s no easy job. For
example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.

The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”

I can assure you that the marking errors in the derivatives business have not been symmetrical.
Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.

Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.

In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the
Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are
fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.

Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.

Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.

On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.

Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market forweeks, was far from a worst-case scenario.

One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.

Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of
derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activitiesof major banks, the only thing we understand is that we don’t understand how much risk the institution isrunning.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly
multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerousthey are has already permeated the electricity and gas businesses, in which the eruption of major troublescaused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives businesscontinues to expand unchecked. Central banks and governments have so far found no effective way tocontrol, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, andthat posture may make us unduly apprehensive about the burgeoning quantities of long-term derivativescontracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

A week is a long time in the markets

2008-09-21T17:38:00.003+01:00

Stelios Haji-Iannou remarked that " If you think risk management is expensive, try an accident".

Last week we started to count the cost of not having sufficent risk management is place in the derivatives' market. There is one estimate that this market is 11 times the value of the global GDP . No one knows how long or how painful it will be to extract the leverage out of that market or what the shape of the global financial industry will look like when it is finished.

Warren Buffet told us that derivatives were "weapons of mass destruction" back in 2002 when he reported on what he found when he unravelled General Re's derivative book. No one else comes close as a risk manager in the insurance business.

The Great Pandemic and the young

2008-09-13T21:34:00.004+01:00

90 years ago this month 12,000 died of influenza in the USA. In October a further 195,000 died. American life expectancy dropped in 1918 by 12 years. Eventually 600,000 American citizien would die of the disease which singled out the young and fit and turned their immune systems against them. The estimates for world fatalities runs from 20-50 million. The truth is we just do not know how many and find it difficult to disentangle the effects of World War 1 with those of the pandemic.

Those authorities which swiftly recognised the nature of what they were dealing with, stemmed the mortality rate by limiting movement, by reducing contact between people and by promotingthe use of masks.

Others, such as the US army which had 13 million men register for the draft in September 1918, unwittingly exacerbated its effects.

Risk Managers should study the history of this great pandemic - if it was to occur again we would need to understand what did or didn't work in 1918, plus how we have moved on since those days, especially in terms of mobility and communication.

Young people take their health for granted, they think such a death couldn't happen to them. Sadly it did for my maternal grandmother in 1919, she was only 30 when she died of influenza leaving behind my mother , then a seven month old baby.

A head above the parapet

2008-09-09T10:53:00.005+01:00

There is a risk in bearing bad news and perhaps an even greater risk in raising risk issues which do not chime with the CEO's world view.

Chris Lajtha of Adageo has sent me the following story from antiquity to illustrate the Risk Manager's Dilemma in the starkest terms:

When Darius, the Persian Emperor, decided to teach Alexander of Macedonia a lesson for invading his empire he assembled an enormous army designed to shock and awe with its size and opulence ( some ideas never go out of fashion).

Alexander did not have support from all Greeks and there were some Greek officers at the court of Darius. One of them, Charidemus, assessed the futility of Darius' approach

"Perhaps," he said, "you may not be pleased with my speaking to you plainly, but if I do not do it now, it will be too late hereafter. This great parade and pomp, and this enormous multitude of men, might be formidable to your Asiatic neighbors; but such sort of preparation will be of little avail against Alexander and his Greeks. Your army is resplendent with purple and gold. No one who had not seen it could conceive of its magnificence; but it will not be of any avail against the terrible energy of the Greeks. Their minds are bent on something very different from idle show. They are intent on securing the substantial excellence of their weapons, and on acquiring the discipline and the hardihood essential for the most efficient use of them. They will despise all your parade of purple and gold. They will not even value it as plunder. They glory in their ability to dispense with all the luxuries and conveniences of life. They live upon the coarsest food. At night they sleep upon the bare ground. By day they are always on the march. They brave hunger, cold, and every species of exposure with pride and pleasure, having the greatest contempt for any thing like softness and effeminacy of character. All this pomp and pageantry, with inefficient weapons, and inefficient men to wield them, will be of no avail against their invincible courage and energy; and the best disposition that you can make of all your gold, and silver, and other treasures, is to send it away and procure good soldiers with it, if indeed gold and silver will procure them."

The Greeks were used to direct speech as well as action, but Charidemus had not recognised how the Persians would react to such a blunt appraisal. Darius was so angry that he ordered him to be executed . "Very well," said Charidemus, "I can die. But my avenger is at hand. My advice is good, and Alexander will soon punish you for not regarding it."

Alexander and his men attacked and , as Charidemus predicted, they destroyed the enormous, unwieldly and polyglot army, forcing Darius to flee, leaving his wife and mother to be captured by Alexander, who treated them well.

Risks and type

2008-08-31T12:25:00.007+01:00

Anne Fadiman is a wonderfully perceptive reader and she throws up lots of risks which attentive proof readers salivate over, some of which have serious consequences. In no particular order:

* misplaced apostrophes and spaces- my example would be man's laughter or manslaughter.
* misspellings as in the opening paragraph of Beverly Sills' memoirs -" When I was only three and still named Beverly Miriam Silverman I sang my first aria in pubic."
* key words missed out - here her example of the 1631 edition of the St James Bible which had the 7th commandment as "Thou shalt commit adultery."
* misplaced decimal point in a ship's mortgage in 1986 by a New York Law firm which cost their client $11 million.
* omitted hyphen by a NASA computer progammer from Mariner I's flight programme which sent the probe off course so badly that it had to be destroyed, thus wasting the $7 million investment.

However in writing this appreciation of her book "Ex Libris, Confessions of a Common Reader" I find myself at risk of offending her by describing it as a masterpiece, which has far too masculine an overtone for one so alert to gender issues in print, yet mistresspiece seems inappropriate and presumptuous and mispiece reads like the female equivalent of codpiece. So here we are, the only way around is to advise you to read her piece de resistance.

Impact on the public domain

2008-08-27T07:50:00.005+01:00

Great risk management quote from Sir Edwin Nixon's obituary in the Telegraph today;

"Write nothing internally without considering its impact on the public domain."

Nixon became managing director of IBM UK in 1965 and retired as Chairman of its holding company in 1990, a remarkably long tenure, by today's standards. He also was Chairman of Amersham International from 1988-1996 overseeing notable growth.

In 1968 when I worked at Dexion, known for its slotted angle storage systems , Eddie Nixon was still proudly remembered after his four year stint as a Dexion management accountant, his first business post, as " the one who got away". He certainly managed his career risks extremely well and the obituary records that "although both approachable and good humoured, he was at the same time a perfectionist who liked things done well, and with style."

How does your CEO match up?

Holidays, fun and risk

2008-08-18T16:14:00.008+01:00

Holidays away from home are fraught with risks. You are in an unfamiliar place, exposed to unfamiliar weather, eating unfamiliar food and without the restraints that normally you recognise. On top of all of this you have the absurd expectation that, because you are on holiday, nothing can go wrong. Truth is you don't want to think about details when you are on holiday.

I have seen a middle aged European holidaymaker agree to be strapped into a parachute harness and towed into the sky by a motor launch off a Phuket beach whilst a Thai lad, sitting on his shoulders, manipulated the parachute cords to steer him around the bay. To make matters worse the boat did not have a clear run to get up speed, but had to weave its way through the swimmers near the beach.

The issue was not did he have insurance - it would probably not have paid out if there had been an accident - but why did he not recognise the danger and the slapdash nature of the people who he was about to risk his life with. Maybe he was too laden with alcohol to take a sensible view, even more likely he thought it a good idea at the time and, his protective mantra was " nothing can go wrong, 'cos I'm on holiday." Nine times out of ten there was no problem, but those are only slightly better odds than Russian roulette.

The same lack of thought can happen on company away days, where risks are taken, often by the chief executive, with the whole management team, in the interests of bonding. There is usually no attempt to understand the risks and to get the team to find ways of mitigating them, there is just the focus on the goal of having a good time and there is sometimes an element of bullying . Directors who allow such thoughtless risk taking may find themselves faced with a corporate manslaughter charge if things go wrong. On holiday you're on your own.

Sounds familiar

2008-08-06T10:25:00.004+01:00

Compare and contrast -

"It is clear that there has been a mispricing of risk.The Market did not understand the value or importance of liquidity and some banks did not fully understand some of the instruments they were dealing in."
Mervyn Davies, Chairman of Standard Chartered this week.

" A board that does not understand the strategy may not appreciate the risks, and if it does not appreciate the risks it will probably not ask the right questions to ensure the strategy is properly executed."
Justice Neville Owen in his summing up during the HIH bankruptcy case.

Careless Talk Costs Jobs

2008-07-31T15:45:00.006+01:00

We have all enjoyed a good laugh at the Government's expense over their loss of computers and personal records. Yet I wonder how savvy we are when it comes to protecting sensitive information regarding our work.

Everyday on the commuter train you can hear detailed conversations of business contracts, disciplinary procedures and named individuals. Less obtrusive, but potentially even more damaging are those who work at their laptops on company documents with people standing or sitting next to them and well able to view what they are working on.

The same relaxed attitude is true of guests in restaurants and people talking or working on flights. I have seen documents across an aircraft aisle relating to a company which I was very familiar with, being worked on by a Japanese executive, which led me to believe that he was running his slide rule over them with a view to taking them over. A former Chairman of mine bragged of overhearing a conversation in a restaurant which led him to bid for the work under discussion and obtain it.

"Careless talk costs lives "was a watchphrase of World War2. We don't face such dire consequences but perhaps we need to revive it to read " Careless talk costs jobs" - starting with our own.

Too close for comfort

2008-07-31T15:23:00.006+01:00

Well,well who would have thought it, the Transport Research Laboratory has found that 10,000 accidents in 2006 were caused by tailgaiting, the practice of driving right behind the car in front in an effort to intimidate them to move over or because you don't want anyone to cut in. Such car owners are known in the Welsh Valleys, I am reliably informed, as dog drivers - work it out.

Then there was the information that 90% of motorist were tailgated when they kept to the speed limit and only 50% when they drove without regard to it. It doesn't say how many of these are Central Lane Only Drivers (CLODs to the police) who add to a journeys' frustration.

The only three reliable risk management ploys I have come across with regard to tailgaiters are 1. to fit a switch to the dashboard to flash the brake lights without braking - one of my sales managers used this very effectively - smart man - he was also the only sales man in our electronic component company that Alan Sugar had time for 2. Follow the sensible advice of an American friend - drive so you have fast idiots in front, slow idiots behind 3.Have a number plate like my mother's - R2NEA -she has never been in a tailgate accident in 72 years of driving, but then she doesn't do motorways these days.

It's none of his business

2008-07-25T15:18:00.005+01:00

Steve Jobs has been criticised for not being frank with his shareholders about his health. He has had one bout of cancer some years ago and the speculation is that he may be suffering a recurrence.

Any shareholder who buys Apple stock on the strength of Jobs being at the helm, must recognise that they are taking on an unusual set of risks. On the upside there is Jobs' extraordinary ability to develop new products which the world then realises that it wants extravagantly. On the downside there is the possibility, just like anyone, that he might not last out the year and the fear that he is irreplaceable.

There is no key man insurance big enough for Steve Jobs and the shareholders must accept that and not bleat about wanting to know the intimate details if he does not want to give them. You buy Apple stock for the ride and if it gets too scarey, jump off.

There's nowt so queer as folk

2008-07-25T14:56:00.005+01:00

Looking at some of the news stories I am continually amazed at the low probability high impact stories which surface. It is, of course, the low probability which provides for the surprise element.

Talking of "surprise element" one of the stories was the tragic tale of the Polish visitor to England who relieved himself on the railway track. Not a problem in Poland where, if I remember rightly, the electricity cables are overhead. Sadly in the UK with the live rail right next to the usual track his mistake was fatal.

Then there were the three US crew who were found asleep on the job. Problem was that their job included access to nuclear weapon codes. Question I would like an answer to is" what were the conditions that made them all doze off?" Then it turned out we had not been in as much danger as it seemed as the codes they were guarding were out of date. Maybe we should go back to using geese, at least they don't sleep on the job.

Then there was the report that there have been 300,000 traffic accidents which have been caused, it was claimed, by SatNav, or rather by listening to SatNav and not using enough gumption. Imagine what a swarm of lemmings could do with SatNav - they might avoid going over the cliff. Unintended consequence.

The hammer and the aircraft carrier

2008-07-19T12:00:00.003+01:00

An American aircraft carrier set sail from San Diego after a re-fit with a number of fitters still working on board. Three hours out one of the fitters reported that he had lost a hammer in an area which was potentially dangerous to the ship's operation and its safety.

The Captain immediately ordered the ship back to port, where after a fairly extensive search the hammer was found.

The punishment for the fitter? To be decorated for having the guts to own up to a mistake which could have badly damaged the ship. A good example of Think Risk, Smarter Decisions.

I don't think this is apocryphal, but I can't remember the original source. Let me know if you do.

Licensed to Hug

2008-07-10T20:41:00.007+01:00

In the months after 9/11 I had a call from Frank Furedi, the Professor of Sociology at the University of Kent. He wanted to research the reaction to 9/11 and he needed to talk to risk managers and he needed funds. I arranged for AIRMIC to provide the risk managers and Lloyd's the funds. The result was Frank's report, which went out under the sponsorship of AIRMIC and Lloyd's called "Refusing to be Terrorised". Well worth reading.

Now he has just published with Jennie Bristow, a new report "Licensed to Hug"about vetting adults who work with children . Here is a brief section from his website http://www.frankfuredi.com/ on the subject- once again Frank is dealing with the fears of society and exposing how we are in the grip of idiots:

"The alleged protective effects of a system of vetting are largely illusory. Aside from the fallibility of record-keeping and technical systems, vetting takes into account only what somebody has done in the past. The most sophisticated system in the world cannot anticipate how individuals with a clean record might behave. Thus, the CRB provides little guidance about people’s behaviour in the future. It provides the impression of security, but not the substance. It is difficult to avoid the conclusion that the national vetting scheme represents an exercise in impression management rather than offering effective protection. Vetting measures also fuel suspicion about adults. In that sense, they are not just harmless rituals, but negatively influence the conduct of adult-child relationships.

Although proponents of the scheme contend that it is designed to prevent “worst-case scenarios”, the very institutionalisation of the scheme encourages worst-case-scenario assumptions to become the norm. One consequence of this process is that adults feel increasingly nervous around children, unwilling and unable to exercise their authority and play a positive role in children’s lives. Such intergenerational unease has not made children safer than in the past: if anything, it is creating the conditions for greater harm, as adults lose the nerve and will to look out for any child who is not their own. Perversely, it inadvertently encourages grown-ups to avoid their responsibility for assuring the well-being of children in their community. One of the principal consequences of the vetting of grown-ups is the legitimisation of the idea that it is not the responsibility of the older generation to take a direct interest in the lives of children. "

Click here to read the AIRMIC Press Release from 17th June 2002...

Floods, supply chains and cash flow

2008-07-08T08:50:00.005+01:00

Floods are a particular problem for supply chain management. When all roads out are rendered impassable there is little comfort in having your factory on the top of a hill; staff can't make it to work, supplies can't be delivered or products shipped.

The impact is on the cash flow of the business. With no shipments there are no invoices and, if customers are also affected by floods then there may well be cancellations or contracts voided because of force majeure.

Bob O'Connor of A.M.Best spotlights the issue in his interview at the AIRMIC Conference with Dan Trueman of Kiln who are working to create insurance products to cover the revenue that the supply chain generates and respond to non-damage business interruptions. This is relevant to small companies as well as large, the sort our Business Continuity Management Online Course is designed to help. For more on that see http://www.riskrisk.com/

Risk Management is like a sheep dip

2008-07-02T20:48:00.005+01:00

Risk Management is like a sheep dip. In order for it to be really effective the whole flock needs to be periodically immersed in the process.

57% of all reported fraud is inhouse

2008-06-30T17:16:00.004+01:00

Here are some Statistics which raise some issues but should be kept in the context of the world's largest financial city:

* Reported fraud cost the UK £705 million in the last six months an increase of 74% of the same period a year ago.
* Of that £636 million was in the finance and insurance sectors.
*London and the South East account for £634 million of the total.
* Management fraud accounts for 46% of fraud reported.
* Other employee fraud is up from 2.5% of the total a year ago to 11%.
* When the employee fraud is added to the management fraud we get a total of 57% of all fraud is in house or £402 million.

I rang the company who provided these numbers, BDO Stoy Haward, to ensure that I had understood them and to understand what the difference was between management and employees - employees are people, according to BDO Stoy Haward, who are not managers.

The report only covered frauds in excess of £50,000 and I guess the insurance and banking sectors being tightly regulated are more likely to report than other sectors of the economy.

What is clear is that in a recession some people become more likely to take the risk of committing fraud in order to fund a lifestyle, a credit card or a mortgage. This probably applies to minor fraud, shoplifting, burglary and mugging too. It will become worse if unemployment grows and there will doubtless be headlines to worry us when it does.

Just to cheer you up the report also mentions that the cases of fraud against the inland revenue is £22million which compares rather favourably with the same period last year when it was £336 million, unless, of course, they have left the records on the train.

Chance hardly affects the wise

2008-06-28T21:38:00.004+01:00

"Chance hardly affects the wise; the really important and serious things are under control of their own deliberation and reason. No more pleasure could be derived from a lifetime of infinite span than from a life we know to be finite."

Cicero quotes ,with approval this remark of Epicurus , translated by Rapahel Woolf. Seems to me to be what all risk managers might aspire to.

However on the subject of the infinite Richard Donkin in Thursday's FT pointed out that Einstein once remarked "Two things are infinite: the universe and human stupidity: and I'm not so sure about the universe."

Are there lessons from the Sarin Gas attack?

2008-06-25T17:18:00.006+01:00

Very low probability, high impact risks are difficult to identify, unless like the New Madrid fault they have been closely researched and some idea of their impact and probability has been estimated. Lloyd's, I was once told, consider the New Madrid Fault to be the greatest risk on their books and the probability of a 8.0 strength earthquake in that area occuring in the next 50 years is put at between 7 and 10% , as stated in the June 23rd 2005 issue of the magazine, Nature.

If it was to occur it might be trigger a number of similar quakes. In 1812 there were 4 earthquakes in2 months ranging from 7-8 on the Richter scale caused by the New Madrid fault which runs from just south of Indianapolis down to Memphis.

My most unlikely high impact, low probability event was the 1995 Sarin Gas attack when I was living in Tokyo and one of the Sarin canisters passed on a train within 100 meters of my apartment. No one in my family was affected, not even my brother visiting from England who with two other professors from Sheffield University was wandering around Kasumigaseki, the Whitehall area of Tokyo and main target for the attack , wondering why there were so few people! However 12 people died and several hundred were injured.

In reviewing what I might have done differently I can see no lessons to be learned for me as an individual, which is one of the problems with this type of random high impact event. The Tokyo authorities learnt some salutary lessons regarding the readiness of their hospitals to deal with an emergency and the police learnt that they should act more forcefully when there is evidence of terrorist activity ( there had been a similar Sarin attack seven months earlier and 7 people had died) . The New Madrid earthquake , being of higher probability will find the US Mid West better prepared than Tokyo that day in March 1995.

Martin Sullivan's journey

2008-06-19T17:14:00.007+01:00

Not many of the CEOs who have lost or will lose their job this year will leave behind so many of their colleagues feeling bereft as does Martin Sullivan of AIG. After 35 years with the company he has made his mark as a very capable and humane leader. It was always a risk to take the reins of an organisation which had been so closely identified with its two previous leaders, but I cannot imagine that he regrets having had his hand on the tiller. For someone to work from the age of 17 for 35 years with the same company is not as common as it used to be. For that person to make it to the top of the world's largest insurer is a very great journey indeed.

For us in the UK there was especial pride in Martin's leading one of the Global 100 companies. When I introduced him at an AIRMIC breakfast forum in London two years ago I pointed out that only Lindsay Owen-Jones at L'Oreal, Howard Stringer at Sony and Martin had done that with a non UK company.

We wish him well for whatever he wants the future to hold.

Identity trashing

2008-06-15T17:13:00.006+01:00

There is a lot of concern about identity theft. The BBC often reports on the sort of defensive procedures you need to adopt and credit cards providers offer to protect you in event of a loss.

There is far less concern about identity trashing on the internet, but a thoughtful piece in the weekend Financial Times by Christopher Caldwell sets out the risks of having your reputation damaged online.

First the internet is a very unforgiving medium. You get trashed on it once and it remains forever, regardless of what you do in the meantime. (Not completely new, of course, there is the story of the nobleman who broke wind when bowing to Elizabeth 1st and when he returned to court twenty years later the Queen said, " You are welcome ,my lord, we have quite forgot about the fart.")

Secondly a search will be able to find malevolent material and this could affect personal, business and employment relationships.

Thirdly there is far more protection for intellectual property than for privacy, especially in the USA, where it is hard to get redress.

Fourthly, the barrier to managing huge amounts of data on people has now been overcome by computing power and therefore people could be open to greater personal surveillance than ever before.

Caldwell points out the importance of the low evaluation by the public of these risks, "Privacy is the realm in which personal convictions ripen into public engagements - no privacy, no democracy. To judge from the amount of information shared online people are not yet terribly worried about privacy. That is another way of saying that they are not terribly worried about liberty."

David Davis who resigned his Parliamentary seat this week over the obtrusiveness of the State in survelliance matters and its assault on human rights in the name of security is tilting at an important windmill.

Sir Howard and the Toxic Products

2008-06-11T11:38:00.008+01:00

Anthony Hilton in his City Comment column in the Evening Standard on Monday June 9th 2008 pointed out that the authorities were not unaware of what the bankers have been up to over the last few years and that Sir Howard Davies, when head of the FSA, delivered a speech in which "he clearly and explicitly warned about the invention of collaterised debt loan obligations and credit default swaps and described them as toxic."

He went on to say " Nor did you have to attend the dinner to hear the speech. His remarks were reported in this column".

In fact it wasn't a dinner it was the AIRMIC Lecture of January 29th 2002 at the RAC Club. Go to the link below for Roger Miller's report and the quotes on the second page in italics.

http://www.riskrisk.com/howard-davies-comments-feb02.pdf

Anthony Hilton points out that nothing the FSA could have done would have prevented the current turmoil, the bankers were uninclined to listen and quite capable of moving to more compliant regimes if the FSA had attempted to rein them in.

How we got Sir Howard to speak I will leave for another blog.

Zen and the Art of Risk Management

2008-06-11T11:02:00.004+01:00

I have Geoff Tudor of the FUJI Club in Tokyo to thank for the following quotes, where he got them from I am not sure., they were entitled "Important Zen Teachings." I have selected the ones that relate to risk for your enlightenment.

"Never test the depth of the water with both feet."

"If at first you don't succeed, bomb disposal is probably not for you."

"Bungling,confusion,misplaced power"

2008-06-04T16:33:00.010+01:00

Richard Overy in his remarkable book "Why the Allies won" describes how the Germans frittered their technical lead and their scarce resources away during World War 2 ;

"The German armed forces pursued technical excellence for its own sake..... The military domination of production had mixed effects. There is no dispute that Germany developed weapons of very high quality...but the pursuit of advanced weaponry came at a price. Instead of a core of proven designs produced on standard lines the German forces developed a bewildering array of projects. At one point in the war there were no fewer than 425 different aircraft models.

' Nobody could seriously believe that so much bungling, confusion, misplaced power, failure to recognise the truth and deviation from the reasonable could really exist.' complained a group of German engineers."

Well today we have news that the National Audit Office has discovered 8 Chinook helicopters which have been so specially modified to the requirements of the British military establishment that they are unsuitable for use seven years after original delivery, despite them being badly needed, and the modifications to bring them back to service will double their original cost.

In trying to get certainty you often miss achieving your objective.

Peeing on the electric fence

2008-06-01T17:12:00.004+01:00

"There are three kinds of men. The one that learns by reading. The few that learn by observation. The rest of them have to pee on the electric fence for themselves."

Will Rogers who wrote the above, died in a plane crash in 1935, and triggered the biggest outpouring of popular grief in the US between Lincoln and Kennedy. He deserves better acquaintance.

Think risk, smarter acquisitions

2008-05-27T21:31:00.004+01:00

For any company contemplating an acquisition the following reality check from Justice Neville Owen is very pertinent.

"A Board which does not understand the strategy may not appreciate the risks, and if it does not appreciate the risks it will probably not ask the right questions to ensure the strategy is properly executed."

For two Boards contemplating a merger it is probably a deal breaker.

Two words connected

2008-05-20T14:30:00.004+01:00

Shakespeare when we wrote Hamlet had frequent recourse (66 in fact) to hendiadys which is "the expression of an idea by two words connected by 'and' instead of one modifying the other". Examples such as 'law and order',house and home' are hendiadys as well as Shakespeare's own 'sound and fury' and "the book and volume of my brain".

James Shapiro in his book about Shakespeare "1599 " remarks that "when conjoined in this way the nouns begin to oscillate, seeming to qualify each other as much as the term individually modfies." They press on the audience's imagination, stretching the possible meanings and creating new connections.

I think it accounts for the discomfort and excitement that the phrase " risk and reward" provides.

Misleading percentages

2008-05-19T12:12:00.003+01:00

"House sales to fall by 40%" is the headline used to attract attention by Yahoo to a report from the Chartered Surveyors.

This is serious, but it is also misleading. When you read on you find that house prices are expected to fall by 5%, whilst house sales plummet 40%.

The immediate downside risk is to the estate agents, the surveyors, and the removal companies.

But sales and prices are easily confused and most will think that the prices are to fall precipitously. They may, but that is not what the report expects.

Growler

2008-05-15T22:23:00.005+01:00

Nigel Lucas, the Chairman of Risk Publishing Online, was an officer in the merchant marine years ago and tells me that , contrary to landlubbers' belief that all icebergs are 10% above the waterline there is another type which is totally submerged. This is called by sailors a " growler" presumably from the noise the hull makes on contact.

In risk management terms you either need sophisticated sonic detectors to pick it up or a look out on the prow of the ship.

Whatever the detection method "growler" is a great name for risks which you cannot identify until almost on top of them, but which lurk just under the radar! The people best able to detect them are at the sharp end of the business.

Brown on uncertainty

2008-05-07T09:39:00.004+01:00

In our blog of September 11th 2007 we reckoned that Gordon Brown would not call an election at that time and that he might live to regret it.

What has become clearer with every mini crisis is that Brown is very risk averse and that his instinct is always to try to reduce uncertainty to the minimum. This approach worked as Chancellor because he was able to focus on a narrow set of criteria and he had Blair to force through decisions when he did not have enough data for his comfort. As Prime Minister he has to make decisions without enough certainty and he has to accept that sometimes the decisions will go awry.

He is a good example of a manager playing to his strengths even when they are not appropriate for the situation. It is unlikely that he will be able to change and the electorate is starting to see the mismatch.