*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
I just finished King Capital: The Remarkable Rise, Fall and Rise Again of
Steve Schwarzman and Blackstone, by David Carey and John E. Morris. I
finished it on the beach in the Bahamas as I am on a short working
vacation. The story of Steve Schwarzman and Blackstone is quite well known
to anyone who follows the capital markets and the private equity market in
particular. The impact of private equity on the fates of publicly traded
corporations makes for an interesting beach read. The impact of private
equity on the publicly traded corporation also makes for a lively dinner
debate – depending on whom your dinner mates are.
As I finished the book, listening to the waves run onto the beach, a thought
occurred to me – "What if risk management at each company was publicly
traded (perhaps through an equity carve-out). What impact would a private
equity take-out have on the operations of such risk management
departments?"
I think it is an interesting question – one that I might get back to after
I finish the cocktail that was just brought to me.
[1] https://twitter.com/rsdsolutions
Wednesday, December 4, 2013
Tuesday, December 3, 2013
Duhhhh!
*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
A good friend, and a fellow risk consultant, Steve Lindo sent me an email
this morning talking about a recent IMF report that was quoted in a recent
issue of Bloomberg Businessweek. The report stated that rich people react
differently than poor people to economic incentives. Steve's insightful
response was "Duhhhh!"
The results are the report are so obvious that Steve is correct to make light
of it, but if you think for a minute, do we not make a similarly insane
assumption when we create risk rules? Namely, do we not assume that
everyone will react to the rules and regulations in the same way? Banks,
and bank regulators make rules assuming that everyone has the same incentive
to make sure that they are followed. Duhhhh – they don't. Risk
managers make rules and regulations assuming that different functions of the
organization have the same incentive to enact the rules. Duhhhh – they
don't. Perhaps even as parents we make assumptions that our kids will
follow the same rules and guidelines as they grow up. Duhhhh – they
don't (and won't).
Perhaps I ought to go read the report.
http://www.businessweek.com/articles/2013-11-07/economists-discover-the-poor-behave-differently-from-the-rich
[2]
[1] https://twitter.com/rsdsolutions
[2]
http://www.businessweek.com/articles/2013-11-07/economists-discover-the-poor-behave-differently-from-the-rich
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
A good friend, and a fellow risk consultant, Steve Lindo sent me an email
this morning talking about a recent IMF report that was quoted in a recent
issue of Bloomberg Businessweek. The report stated that rich people react
differently than poor people to economic incentives. Steve's insightful
response was "Duhhhh!"
The results are the report are so obvious that Steve is correct to make light
of it, but if you think for a minute, do we not make a similarly insane
assumption when we create risk rules? Namely, do we not assume that
everyone will react to the rules and regulations in the same way? Banks,
and bank regulators make rules assuming that everyone has the same incentive
to make sure that they are followed. Duhhhh – they don't. Risk
managers make rules and regulations assuming that different functions of the
organization have the same incentive to enact the rules. Duhhhh – they
don't. Perhaps even as parents we make assumptions that our kids will
follow the same rules and guidelines as they grow up. Duhhhh – they
don't (and won't).
Perhaps I ought to go read the report.
http://www.businessweek.com/articles/2013-11-07/economists-discover-the-poor-behave-differently-from-the-rich
[2]
[1] https://twitter.com/rsdsolutions
[2]
http://www.businessweek.com/articles/2013-11-07/economists-discover-the-poor-behave-differently-from-the-rich
Friday, November 22, 2013
Flat battery
*/By Stephen McPhie, CA
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
I have an old second car that has not been used for quite some time sitting
in the garage. My main car sits outside and was covered with a thick layer
of ice this morning. Faced with the school run, I decided to use the
relatively warm and ice free old car in the garage, kept just for such
situations. Inserting the key in the ignition I heard the dreaded click and
nothing more. So it was a lot of scraping, frozen hands and a cold drive to
my daughter's school in the outside car. I had been comfortable with the
fact that I had a back up system, and ignorant to the fact that it was not
working due to neglect.
In your business, do you feel comfortable that you have adequate back up
plans and systems for when unexpected events occur? Do you constantly
review and test such plans and systems to ensure they are fit for purpose?
[1] https://twitter.com/rsdsolutions
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
I have an old second car that has not been used for quite some time sitting
in the garage. My main car sits outside and was covered with a thick layer
of ice this morning. Faced with the school run, I decided to use the
relatively warm and ice free old car in the garage, kept just for such
situations. Inserting the key in the ignition I heard the dreaded click and
nothing more. So it was a lot of scraping, frozen hands and a cold drive to
my daughter's school in the outside car. I had been comfortable with the
fact that I had a back up system, and ignorant to the fact that it was not
working due to neglect.
In your business, do you feel comfortable that you have adequate back up
plans and systems for when unexpected events occur? Do you constantly
review and test such plans and systems to ensure they are fit for purpose?
[1] https://twitter.com/rsdsolutions
Wednesday, November 20, 2013
Risk management begins with common sense
*/By Stephen McPhie, CA
Partner, RSD Solutions Inc./*
www.RSDsolutions.com [1]
info@RSDsolutions.com [2]
*/Follow us on Twitter/* [3]
*/Repost from blog dated January 11, 2011/*
Andrew Bailey of the Bank of England and designated deputy of the new UK
Prudential Regulation Authority, which will supervise banks, has made some
scathing comments in the Herald newspaper [1] [4] about how RBS and HBOS were
managed in the years leading up to their massive government rescues that
required tens of billions of pounds of taxpayer funds.
His comments are extensive but summed up by his comment: "… people who
ran those two institutions just lost sight of what I would call sound
principles of banking."
I was working in the investment banking sphere in the City of London in the
early 2000's and observed RBS in the wake of its acquisition of NatWest in
early 2000. At the time, the acquisition and integration was arguably the
best executed and most successful of any large bank merger worldwide.
However, the bank then appeared to aggressively pursue a strategy of buying
market share. I saw it commit large amounts to many syndicated leveraged
transactions for inadequate remuneration in terms of the risk. Some
borderline loans led by other banks only succeeded because of this.
Fred Goodwin, the aggressive head of RBS, seemed to want to make his
institution the largest bank in the world and he almost succeeded before the
pile of cards came crashing down. From 2001 to 2007, RBS's assets
doubled, mainly through a string of acquisitions. This culminated in the
disastrous acquisition of ABN Amro, a complete basket case at the time.
Shortly thereafter, RBS required a government rescue.
In my time in the City, I wondered what RBS's balance sheet would look like
if there were a recession. Many people attributed RBS's downfall to the
ABN acquisition. This may have been the straw that broke the camel's
back, but it seems that RBS's balance sheet had been weakening
significantly beforehand. It seems that Andrew Bailey agrees. He said,
talking about the pre-ABN era: "I think there was very rapid expansion of
the investment bank. I think the controls around the expansion of that
investment banking activity were clearly not adequate."
At the same time, Andy Hornby was running HBOS – at least he was supposed
to be. He had been a great success at ASDA (Wal Mart's UK subsidiary) in
running the clothing retail business. He seemed to take the large volume,
low margin mentality into the property lending business at HBOS with
disastrous consequences. (HBOS was easily Britain's largest mortgage
lender and also had very large exposures to property developers.) Many
people blame Peter Cummings, the head of the corporate bank, as being the
main culprit for the debacle but it is questionable whether or not his boss
had any ability to exercise any sort of oversight on his activities.
At HBOS in 2005, Paul Moore, HBOS's Head of Regulatory Risk, warned that
the bank was becoming too risky. Shortly after that he was forced out of
the bank and was replaced by someone he claims had a sales background.
In the cases of both RBS and HBOS, effective and prudent risk management
seemed to go by the wayside in the interests of growth and, perhaps, feeding
giant egos. In fact, never mind sophisticated risk management set ups,
simple common sense seemed to be absent. (The applicability of the term
common sense to the Financial Services Authority at this time is another
topic.)
Interestingly, Andy Hornby has returned to his retail roots as Chief
Executive of Alliance Boots, Britain's largest drug store chain.
------------------------------------------------------------------------------
[1] [5] See
http://www.heraldscotland.com/business/corporate-sme/damning-verdict-delivered-on-former-rbs-and-hbos-chiefs-1.1079137
[6]
[1] http://www.RSDsolutions.com
[2] mailto:info@RSDsolutions.com
[3] https://twitter.com/rsdsolutions
[4] #_ftn1
[5] #_ftnref1
[6]
http://www.heraldscotland.com/business/corporate-sme/damning-verdict-delivered-on-former-rbs-and-hbos-chiefs-1.1079137
Partner, RSD Solutions Inc./*
www.RSDsolutions.com [1]
info@RSDsolutions.com [2]
*/Follow us on Twitter/* [3]
*/Repost from blog dated January 11, 2011/*
Andrew Bailey of the Bank of England and designated deputy of the new UK
Prudential Regulation Authority, which will supervise banks, has made some
scathing comments in the Herald newspaper [1] [4] about how RBS and HBOS were
managed in the years leading up to their massive government rescues that
required tens of billions of pounds of taxpayer funds.
His comments are extensive but summed up by his comment: "… people who
ran those two institutions just lost sight of what I would call sound
principles of banking."
I was working in the investment banking sphere in the City of London in the
early 2000's and observed RBS in the wake of its acquisition of NatWest in
early 2000. At the time, the acquisition and integration was arguably the
best executed and most successful of any large bank merger worldwide.
However, the bank then appeared to aggressively pursue a strategy of buying
market share. I saw it commit large amounts to many syndicated leveraged
transactions for inadequate remuneration in terms of the risk. Some
borderline loans led by other banks only succeeded because of this.
Fred Goodwin, the aggressive head of RBS, seemed to want to make his
institution the largest bank in the world and he almost succeeded before the
pile of cards came crashing down. From 2001 to 2007, RBS's assets
doubled, mainly through a string of acquisitions. This culminated in the
disastrous acquisition of ABN Amro, a complete basket case at the time.
Shortly thereafter, RBS required a government rescue.
In my time in the City, I wondered what RBS's balance sheet would look like
if there were a recession. Many people attributed RBS's downfall to the
ABN acquisition. This may have been the straw that broke the camel's
back, but it seems that RBS's balance sheet had been weakening
significantly beforehand. It seems that Andrew Bailey agrees. He said,
talking about the pre-ABN era: "I think there was very rapid expansion of
the investment bank. I think the controls around the expansion of that
investment banking activity were clearly not adequate."
At the same time, Andy Hornby was running HBOS – at least he was supposed
to be. He had been a great success at ASDA (Wal Mart's UK subsidiary) in
running the clothing retail business. He seemed to take the large volume,
low margin mentality into the property lending business at HBOS with
disastrous consequences. (HBOS was easily Britain's largest mortgage
lender and also had very large exposures to property developers.) Many
people blame Peter Cummings, the head of the corporate bank, as being the
main culprit for the debacle but it is questionable whether or not his boss
had any ability to exercise any sort of oversight on his activities.
At HBOS in 2005, Paul Moore, HBOS's Head of Regulatory Risk, warned that
the bank was becoming too risky. Shortly after that he was forced out of
the bank and was replaced by someone he claims had a sales background.
In the cases of both RBS and HBOS, effective and prudent risk management
seemed to go by the wayside in the interests of growth and, perhaps, feeding
giant egos. In fact, never mind sophisticated risk management set ups,
simple common sense seemed to be absent. (The applicability of the term
common sense to the Financial Services Authority at this time is another
topic.)
Interestingly, Andy Hornby has returned to his retail roots as Chief
Executive of Alliance Boots, Britain's largest drug store chain.
------------------------------------------------------------------------------
[1] [5] See
http://www.heraldscotland.com/business/corporate-sme/damning-verdict-delivered-on-former-rbs-and-hbos-chiefs-1.1079137
[6]
[1] http://www.RSDsolutions.com
[2] mailto:info@RSDsolutions.com
[3] https://twitter.com/rsdsolutions
[4] #_ftn1
[5] #_ftnref1
[6]
http://www.heraldscotland.com/business/corporate-sme/damning-verdict-delivered-on-former-rbs-and-hbos-chiefs-1.1079137
Thursday, November 14, 2013
Funny Business
*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
In the October 12 edition of the Economist, there is a short article titled
"Funny Business". It highlights that humor not only helps to sell
products as in humorous advertisements, but it also helps to sell safety
messages. "Jokes can make serious messages more effective" is a direct
quote from the article. Goodness knows it is a worth a try, but has anyone
seen a risk manager with a sense of humor – ever
[1] https://twitter.com/rsdsolutions
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
In the October 12 edition of the Economist, there is a short article titled
"Funny Business". It highlights that humor not only helps to sell
products as in humorous advertisements, but it also helps to sell safety
messages. "Jokes can make serious messages more effective" is a direct
quote from the article. Goodness knows it is a worth a try, but has anyone
seen a risk manager with a sense of humor – ever
[1] https://twitter.com/rsdsolutions
Wednesday, November 13, 2013
Blogs
*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
The worst part about writing a blog is "feeding the beast", or in other
words keeping new ideas flowing. I have been writing this series of blogs
for about 5 years now, and admittedly ideas for new blogs come easier at some
times versus others. (For example you can probably tell I am currently
struggling for new ideas by the mere fact I am writing this specific blog
…)
The best part about writing a blog is "feeding the beast", or in other
words keeping new ideas flowing. Keeping a blog series going for 5 years
forces you to keep searching for ideas and new ways to present old ideas.
Perhaps risk reports should look more like blogs. If nothing else it would
help to bring out the best and worst traits of risk reporting and hopefully
generate more ideas.
(Another blog into the hopper.)
[1] https://twitter.com/rsdsolutions
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
The worst part about writing a blog is "feeding the beast", or in other
words keeping new ideas flowing. I have been writing this series of blogs
for about 5 years now, and admittedly ideas for new blogs come easier at some
times versus others. (For example you can probably tell I am currently
struggling for new ideas by the mere fact I am writing this specific blog
…)
The best part about writing a blog is "feeding the beast", or in other
words keeping new ideas flowing. Keeping a blog series going for 5 years
forces you to keep searching for ideas and new ways to present old ideas.
Perhaps risk reports should look more like blogs. If nothing else it would
help to bring out the best and worst traits of risk reporting and hopefully
generate more ideas.
(Another blog into the hopper.)
[1] https://twitter.com/rsdsolutions
Friday, November 8, 2013
Humans
*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
As I write this I am watching an afternoon of college football. A
commercial that seems to be in a pretty frequent loop is by an insurance
company. The theme of the commercial is "humans". Basically the
commercial shows some silly situations that humans get into that ultimately
require insurance. The background music is "I'm only human" by The
Human League. If you watch American college football I suspect you have
seen the commercial I am talking about.
The theme of the commercial – humans do silly things that lead to mishaps
– is something that all risk managers need to remember. Meanwhile this
has to be a short blog. The commercials are over and the game is getting
exciting.
[1] https://twitter.com/rsdsolutions
Partner, RSD Solutions Inc./*
*/Follow us on Twitter/* [1]
As I write this I am watching an afternoon of college football. A
commercial that seems to be in a pretty frequent loop is by an insurance
company. The theme of the commercial is "humans". Basically the
commercial shows some silly situations that humans get into that ultimately
require insurance. The background music is "I'm only human" by The
Human League. If you watch American college football I suspect you have
seen the commercial I am talking about.
The theme of the commercial – humans do silly things that lead to mishaps
– is something that all risk managers need to remember. Meanwhile this
has to be a short blog. The commercials are over and the game is getting
exciting.
[1] https://twitter.com/rsdsolutions
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