146-0

 

*/by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*


146-0.  That is the combined score of two professional Nigerian soccer games
recently according to SI.com.  One game had a score of 79-0, while the
second game had an equally ridiculous score of 67-0.  While I was once in a
hockey game where the score was 24-0, it was when I was 10 and we were
playing a select team of 14 year olds.  In a professional soccer game
however such a score is absurd.  Or is it?

As you may have guessed, each of the four teams in the two different games
conspired to run up the score so that the winning team would be promoted to
the next level.  Apparently it was simple math in terms of score
differential that would get them promoted - thus the organized lunacy to
produce such a crazy score.

At this point you might be thinking to yourself that this is all quite
interesting, but what the heck does it have to do with risk management –
and the answer is obvious.  With all of the regulation, particularly in the
financial sector, companies and organizations will go to crazy uneconomic
lengths to "make the numbers". 

One only has to look at the car industry and the pricing of electric cars to
see how the auto makers are going to insane extremes to "make the
numbers" on fuel efficiency.  Anyone who has been around Greco-Roman
wrestlers knows that they also go to bizarre methods in the days before
weigh-in to "make weight".  What corporate executive has not thought of
stuffing the distribution channels with dubious sales in order to "make
quarterly earnings" projections.

In risk management we are not immune.  CDO's and their effect on Basle II
numbers immediately comes to mind.  The magic of CDOs were that they could
almost overnight turn a bank's ratios from crap to golden – or at least
according to Basle II.  On the flip side, there were the investment managers
buying the CDOs to make their investment numbers and their portfolio
mathematics look good.  Did anyone really think that some of the crazier CDO
structures were any more reasonable than a 79-0 soccer score?

Common sense cannot be regulated – unfortunately.  It seems that the
powers that be only have the imagination to regulate numbers, and when the
risk is being run by the numbers, prudent common sense and reasonableness
almost always loses. 

Meanwhile, I bet if my teammates and I tried, we could have let the other
team score 80 goals that day.  And being 14-year-old boys out to impress
girls I am sure they would have been only too happy to do so.