Rugby World Cup

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDsolutions.com
info@RSDsolutions.com

I just finished watching the Rugby World Cup match between Canada and France.  A bit early for me to get up, but I wanted to get ahead start on writing my blogs for the week.

Watching the match, it was immediately clear that the Canada team had a far superior advantage when it came to the volume of facial hair.  For instance, France had no one at all in the same league as Canada’s Kleeberger.

There is one tiny problem for the Canadians though – and that is facial hair does nothing to affect the outcome of a rugby match.  Therefore, although the Canadians had a decided advantage in facial hair, it was ultimately not worth much, and Canada lost the match despite a valiant effort – and despite their huge advantage in facial hair.

Now the question is – is your risk department more concerned about winning matches, or more concerned about irrelevant factors such as politics, avoidance of blame, great looking risk reports, great press reviews, state of the art metrics – or even quantity and quality of facial hair?

Go Canada Go!

Size Matters

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDSolutions.com
info@RSDsolutions.com

There is a different feel to working in a small entrepreneurial “shop”.  In an organization where there are a relatively small number of employees, everyone has a sense of ownership and responsibility.  There is more energy and more collaboration – since that is the only way that an organization with few resources can survive.

It is because of this size issues that many companies – particularly in manufacturing - have adopted the strategy of once a unit gets beyond a certain size, they intentionally break themselves into smaller autonomous units.  It keeps the overall company fresh, and inspires the entrepreneurial feeling and sense of ownership that is so hard to maintain in a larger unit.

In the quest for risk perfection, there is an argument to be made that firms have developed risk groups that are simply too large for the professionals within the unit to feel the same sense of ownership and responsibility  than they might  in a smaller less centralized (and less bureaucratic) grouping.  Perhaps it is time for risk units to take a tactic from the manufacturing world and split themselves into smaller autonomous units, so risk professionals can once again feel that they have responsibility and accountability for their actions and decisions.

Understanding Risk: IMF Treating the Symptoms and not the Cause

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by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

A recent paper “The Eurozone debt crisis: Is this a banking problem? (VOXEU, Jordi Gual, September 13^th”) provides a valuable lesson for risk management. In this case, it is the focus on the consequences and not the cause of risk.

 

The IMF recently suggested that recapitalization of Europe’s banks as the most prudent way out of the continent’s economic crisis. Gual argues that such thinking is based on a flawed analysis and at best it serves as a distraction to policymakers. The primary problem facing Europe is a sovereign debt crisis.

 

The call for a recapitalization of the banking system is a distraction and if the sovereign debt crisis was resolved, the banks would not be in trouble. According to the Institute of International Finance (IIF), European banks raised $414 billion in new capital since 2008 compared to their American counterparts which raised $314 billion in the same period. The perception problem is that European banks hold more of their assets in public debt than their American counterparts.

 

One by product of the euro is the pricing of most private and public sector debt at eurozone reference rates. This has resulted in a mispricing of eurozone risk, poor investment choices and a misallocation of capital. The current proposal of bank recapitalization arises from the potential losses from mark-to-market of government debt. The idea is that investors should suffer from the poor investment decisions made by the banks despite having a potential economic cost (credit availability).

 

The real problem is that Europe has built a monetary union with an inherent flaw – the absence of a sovereign safety net, since the debts are accumulated by member states have been incurred in a currency that none control. This is the issue, and not bank recapitalization.

 

Have you correctly identified your source of risk?

 

For more on this follow the link: http://www.voxeu.org/index.php?q=node/6970

 

Engagement

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDsolutions.com
info@RSDsolutions.com

At RSD we do a lot of training.  It is something that we are good at, and something that we enjoy doing.  I believe that being good at something has much less to do with skill and much more to do with passion – or even the more pedestrian “enjoying what you do”.

When we are first contacted by companies about training, they always present us with a wish list of topics that they want their people “trained” on.  In this age of efficiency, the list of topics is always much longer than the time allotted to the training.  This quest for efficiency in training is quite understandable.  However the real efficiency comes not from cramming a lot of training into a short period of time, but from cramming a lot of engagement into a short period of time.

No one likes cramming – admit it, did you really like cramming for an exam when you were in school?  No – it was a drag, a bore, and totally ineffective as you probably lost 90% of the information you crammed within three days after the exam.

What is effective in training is getting engagement of the participants.  At RSD we focus on engagement and getting people who “do things” rather than people who “know things”.  With engagement, training is fun, effective and efficient.  You learn so much better when you want to rather than when you have to.  Cramming sucks.  Engagement is a joy.

Risk Energy

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by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Oswald Gruebel, CEO of embattled UBS is quoted in the paper saying that the recent loss at the firm could not have been prevented because, “If someone acts with criminal energy, then you can’t do anything.  That will always be the case in our business.”

I understand that preventing criminal activity is extremely difficult, but criminal activity to the tune of $2.3 billion is something else.  Where was the risk energy?

Foxes vs. Hedgehogs

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

A fox knows many things.  A hedgehog knows only one thing, but knows it well.  Is your risk management unit a fox or a hedgehog?  There are arguments for both strategies (for example the well known  book Good to Great argues that hedgehog firms perform best, while most will agree that having a portfolio of ideas is preferable).  What is not acceptable however is not knowing which category the firm falls into. 

 

A firm that thinks it is a fox, when it is in reality a hedgehog is as stupid, weak and exposed as a firm that thinks it is a hedgehog when in reality it is a fox.  So what is it?  Is your risk management unit a fox or a hedgehog?