Thursday, September 25, 2008

The dawning of the truth

Three news stories and a thought-piece in the Times today caught my attention. In amongst all the gloom and despondency about the economy, three stories stood out:
  • The potential saving of Fannie Mae and Freddie Mac continues to spook the markets with falls in share prices around the globe (;
  • David Cameron (leader of the opposition here in the UK for overseas members) believes that we need something akin to Chapter 11 as we head towards recession (my word, not his!) (;
  • And yet, BT are talking about investing £1.5bn ($3bn) in fibre optics to upgrade our national apology for broadband (
  • And the thought piece? Daniel Finkelstein writes about the tipping point as behavioural sciences begin to impinge on the national consciousness and policy-makers ( Well there is a thought!

    All of these are grist to the mill for risk maangers. I can't help but feel that this (almost) recession has in part been brought about by a woeful failure of risk management, originally in US financial services, where, I am led to believe, risk management as we understand it is generally very immature. And we are feeling the consequences of that right round the rest of the globe. My reading is that unethical mortgage brokers spotted a fast buck in selling mortgages to customers who had to lie on their applications and did not have a cat's chance of paying them back if the economic conditions tilted ever so slightly against them. Combine that with what can only appear to have been poor product analysis and inadequate governance over the product innovation that went by the name of CDO's, where these lying application forms were piled one on top of the other by mathematicians with brains the size of a jumbo jet, but zero experience of human behaviour. Then factor in a rather large dose of the emperor's new clothes (remember Hans Christian Andersen?) and before you can say "default" you have a credit crunch that brings down Northern Rock, IndyMac and possibly many, many more, including, in the fullness of time perhaps Gordon Brown... How's that for the law of unintended consequences?

    And of course, in all of this, businesses are suffering. Not just the mortgage banks, but run of the mill organisations. Many could go under. So Cameron's thoughts on the insolvency laws are coming at the right time of the (potential) recession, even if they are unlikely to be acted on for years to come. It is just worth remembering that this was the whole point of of Sir Kenneth Cork's proposed reforms many years ago, although Administration (the major innovation of the last insolvency act) does not seem to have done the trick in the way that Chapter 11 does. Talking of Sir Kenneth, who remembers his top ten pointers to a failed company? I can only remember:

    • Company flag on company flagpole
    • Fish tank in the atrium (was an atrium itself one? That would be an indictment of many organisations...)
    • Chairman's Rolls Royce with personalised number plate

    Can anyone remember the others, and is there a more relevant new batch? Perhaps we could create the ERMA list of pointers to failing companies.

    So it was a bright light in the gloom to see the BT story. Although there is the vaguest resonance with 3G - "we don't yet know what people will do with all that bandwidth, but we are sure they will come up with ideas" (my interpretation - not their words exactly). Let's just hope that Alastair Darling doesn't see the resonance with 3G as well, otherwise BT will be in for an auction of 3G proportions, which, you will recall, virtually brought BT to its knees (and which is why O2, its mobile operator, is now owned by a Spanish company). Anyway, isn't it a pleasure to see a company set out its stall to take a managed risk in an adverse economic environment.
    So this then brings me back to Mr Finkelstein's comments. In the risk world it has long been recognised that culture is a fundamental part of "embedding" (horrible word!) risk management. Proces alone is not enough. Likewise, in policy terms regulation and law-making alone will not suffice to stop knife murders, drunken behaviour and the rest of it. Personally I have borrowed heavily from diverse academic disciplines:

    • Geography (Professor John Adams)
    • Law (Professor Rob Baldwin)
    • Economics (Professor Martin Cave)
    • Psychology (Professor Gaskell)
    • Anthropology (Mary Douglas and many others)
    • History (Professor Gwyn Prins)
    • and many many others...

    Long may we be able to inter-weave wide ranging thinking into mainstream risk management. And perhaps we can show the way to policy makers... Or was that where Professor Lord Giddens came in to the story with Tony Blair? Oh well!!!

    Anyone want to join me in pushing the thought leadership forwards?

    Do speak to me! A response, any response makes it worth writing this blog.


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