Matthew 25

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Matthew Chapter 25 in the New Testament of the Bible contains the well known story of the master who went on an extended trip leaving three different servants in charge of three different sums of money. 

 

To one servant the master left a large sum of money and the servant managed to double the amount through prudent investment by the time the master returned from his trip. 

 

The second servant who was given a medium amount of money was also able to double the amount for his master through making wise investments. 

 

The third servant was given a small sum of money to manage.  This servant was afraid of losing any money for his master, so he went and buried the money in a safe place until the master returned.  Upon return the master was furious with this servant for his misguided uber-conservatism.

 

While I do not believe that Jesus had risk managers in mind when he told this story, but he might have.  The question is what kind of a servant are you?  Another good question to ask is what kind of a risk master do you serve? 

 

 

Untitled

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Charles Wyplosz in a recent communique discusses the shift in risk from various European countries to a “de facto” implied guarantee by the ECB  (The ECB’s Trillion Euro Bet, VOXEU, Feb. 13^th.).  The amounts could be staggering as the ECB is taking enormous risk.  Currently, the ECB is holding over euro 200 billion in sovereign bonds from recent intervention and will face nearly euro 1 trillion rollover of European sovereign debt in 2012.  

 

Eurozone sovereign spreads have recently declined with the exception of Greece.  Charles Wyplosz argues that a good part of the drop in spreads is due to the perception that the ECB is “de facto” acting as the guarantor for Eurozone government debts.  The ECB leadership suggests that the decline in sovereign spreads is the result of country reforms. 

 

There is a link between bond spread contraction and the ECB’s long-term refinancing operations (LTROs).  The LTRO bought euro zone leaders time to get their act together.  Fiscal deficits are slowly declining as the sovereign debt overhang persists, the EU banking system remains undercapitalized (current estimates of euro 100 – 200 billion), and a euro-wide recapitalization facility for banks is missing.  Analysts suggest one method for crisis resolution is through the explicit guarantee of government debt. 

 

Previously, ECB officials argued this was not their mandate; it created moral hazard, exposed the system to increased financial risk and reduced politician’s incentive to make the necessary cuts.  The new ECB regime made the LTRO available to commercial banks, but does not do enough to resolve the crisis such as providing a long-term growth strategy.  Greece and Portugal will be unable to grow with their existing debt burden and this may also be the case risk for Italy and other countries as contagion takes hold.  

 

LTROs could make things more dangerous, especially if banks use LTRO cash to acquire more sovereign bonds.  Banks could borrow money from the ECB at very low rates (about 1%) and buy bonds whose yields are much higher.  A wave of sovereign default could turn these bonds into toxic assets and a trillion-euro problem.  The more the banks accumulate these bonds the riskier the situation becomes.  The problem is compounded by the fact that banks are regulated by national authorities and under pressure to increase their domestic bond holdings.

 

The ECB seems to be making a bet that the market is swayed by its recent action and provides a stable equilibrium.  Holding sovereign debt will be seen as safe and the ECB has saved the euro at a minimal cost.  However, the reversion to a stable equilibrium is not guaranteed.  Should markets conclude crucial policy actions are missing, the debt defaults will spread and Eurozone banks might fail imposing a massive cost to taxpayers and leading to further euro problems.

 

The ECB has bought time for authorities and has involved taking on enormous risks.  The lack action on long-term restructuring of the underlying euro treaty and the promotion of a long-term growth strategy could negate their action.

 

For more information on this follow the link:  http://www.voxeu.org/index.php?q=node/7617

 

Risk Washing

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Going through the week’s mail I received the one of the few annual reports that I elect to receive from one of the companies that I invest in.  Yes – I am one of those old fogeys that still occasionally looks at them in hard copy form. 

 

As I tell my students, the only sections that I look at are the MD&A and the notes.  I found the notes were particularly interesting in this one annual report I received this week.  They are interesting in that there is an incredible amount of detail on the company’s risk management policies.  It explains all of the risk management strategies they have in place – stopping just short of describing the risk management practices in place for when the “C” level officers clip their toe-nails.  It is truly overkill.

 

It got me to thinking about what the objective of all this risk reporting is.  While it is great that companies are taking risk reporting seriously, there is also the possibility of too much of a good thing.  You can refer back to my article “Is Your Risk System Too Good?” in the RMA Journal (http://www.rsdsolutions.com/quotis-your-risk-system-too-goodquot-article-rick-nason-published-rma-journal).

 

The only reasonable rationale that I could come up with for so much risk reporting was “risk-washing”.  With all of the emphasis on risk awareness and risk preparedness, I can only assume that this company wants to be seen as a leader in risk management.  However just as companies that try too hard to be seen as being environmentally friendly get accused of “green-washing”, it may be the case that we will start to see companies “risk-washing”.

 

Venture Capital

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

As part of my preparation to teach a seminar on advanced investment techniques, I have been reading up on what the latest is in the field of venture capital.  In going through old interviews and notes I had compiled the one thing that struck me about venture capitalists that being their desire to have someone leading the company who is flexible.  Every venture capitalist hates to have someone who is overly passionate about an idea.  An overzealous entrepreneur is likely someone who will not be willing to change course when things inevitably do not go as planned.  It is considered far better from the VC’s point of view to have someone who has a general idea, rather than a fully articulated plan that they are determined to stick with through thick and thin.

 

I believe there is a lesson here for risk managers.  As a profession we tend to be like over-planned overzealous entrepreneurs who demand to have every detail thought out in advance.  While planning is obviously a necessity, it is possible to over-plan.  It is also possible to be overly committed to a plan.  That goes for a business plan or for a risk plan.  Things will happen.  Things will change.  Assumptions will prove to be incorrect.  Economic shifts will happen.  When the inevitable happens, commitment to a plan can be just as costly as not having had any kind of plan at all in place.  Just like a venture capitalist, you need to learn to know when and how to be flexible.

 

Now if we could only get regulators to understand that point. 

Dangerism

By Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Just finished reading the very interesting TED book “Beware Dangerism” by Gever Tulley.  http://tinyurl.com/6me2gww

 

A lot of interesting ideas in this very short book.  The central thesis is that kids need to be protected from overprotective parents so they can learn how to deal with risk.  Perhaps there is a corporate analogy to Dangerism, in that companies need to be protected from overzealous regulators and risk management systems so they can learn to deal with risk!

Spray and Pray

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

This week I had my photo shoot for a speaker series that I am participating in.  Each professional photographer has a different style – each of which seems to be more annoying than the previous one.  The photographer this week however was different.  He came into my office, sat himself down and talked to me.  No rushing to get lights set up – no running around the room with a light meter – no assistant with a make-up kit.  Yes – he did set up lights, yes he did check light levels, no he did not apply make-up to my ugly mug (probably should have).  But he did talk.  He engaged me in a conversation.  Occasionally while talking he would take a photo or two.  But the number of photos was minimal.  Then after about 20 minutes of conversation and about a dozen photos he thank me for my time and said he was done!  I was shocked!  What?!  Only a dozen photos or so.  I was expecting at least 5 times as many shots. 

 

As he was leaving I asked him why so few photos.  His response was very telling.  He said, “I believe in understanding my subjects.  When I do that I only need a few photos to get a great shot.  I don’t need to spray and pray like other photographers”.

 

Interesting.  He actually tries to understand his subjects as people so he can take better photos. 

 

What about risk managers?  Do we “spray and pray” with our vast amounts of modeling and analysis and data collection, or do we try to understand the people in our organizations and thus need only a fraction of the data that we normally collect and analyze?

TED

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Some of you – hopefully all of you - may be familiar with TED talks.  If not, go to www.TED.com right now.  You are in for a treat.  TED talks are of course are a series of talks by interesting people on interesting subjects.  They are short, they are impactful and they are to the point. 

 

TED stands for technology, entertainment and design.  The theme of non-profit TED is “ideas worth spreading”.  There are hundreds (if not over a thousand) TED talks that are available for free at TED.com.  All the talks are short (20 minutes or less), and cover a fascinating range of topics.  A great way to spend some quality time with your computer.

 

I recently searched for “risk” and “risk management” on the TED site.  Came up with nothing.  It appears that risk managers are either just not dynamic enough or interesting enough or into technology, entertainment or design.  Although it is a TEDx talk, (emphasis on the “x”), I hope to change that.  www.tedxhalifax.ca