Risk Rap

Rapping About a World at Risk

Toward A New Iconoclasm

Its good to be the King.  When King James ruled England at the dawn of the 17th Century he authored a doctrine of the Divine Right of Kings.  He likened his position as “little Gods on Earth”, who were chosen by Divine Providence to rule and to make the rules.

The current incarnation of King James, in the form of Lebron James also assumes the form of a Little God.  Since the announcement of his free agency status, His Highness has captured the imagination of sports fans, entertainment moguls, broadcast network executives, local businessmen, political leaders and product marketing pros keen to see how the hottest entertainment property in sports maximizes its value by casting his bread upon the waters of free market capitalism.

This marketing juggernaut held the hopes of major metropolitan areas hostage to the idea that King James may anoint their humble cities by moving his throne to one of  their majestic sports palaces.  The hope is that King James and supporting cast will bring an NBA crown to the impoverished masses starved to eat the championship crumbs that fall from His Highness’s banquet table.  It is believed that the Court of King James will establish a home court dynasty, erecting the preeminent Kingdom that will rule over all the lesser fiefdoms of the NBA.

Five cities planned coronation ceremonies for King James but only one city would be able to taste the bread of champions his rule would surely bring to his new kingdom.  That would leave four other cities wanting; condemning them to suffer the hunger of unfulfilled championship dreams they believe only King James can bring to their metropolis.  King James commanded an hour of air time on ESPN to make his royal decree that he would accept Miami’s urgent petition and join The Heat.   King James’ former kingdom, Cleveland suffered the worst of it.  The abdication of their beloved King has shocked this secondary market hamlet into a deep examination of self worth, prompting the fear of deepening economic malaise and a self loathing brought to the surface by the painful rejection by their home town deity.

In a broader sense we should all learn from Cleveland’s experience.  The connection between a human commodity and its consumer is always a tenuous and short lived relationship.  If the consumer can afford the price,  a human commodity will bestow its attention with fealty and reciprocated affection.  America is a highly developed market of  culture consumers.  We invest a great amount of economic and  psychological capital into relationships with media stars, entertainment products and sports heroes.  We confer a royal status upon them.  Our veneration is measured in dollars spent and emotional capital invested.  We believe them to be sacred icons.  Our gleeful consumption of these identity product brands contort and warp our souls.  We begin to believe that they are part of us and construct an existential fantasy that these product brands are actually connected to us.  The sex appeal of Lady GaGa’s consumer fetishism, the nobility of  Sarah Palin’s political opportunism and the dominating machismo of LeBron James supra athleticism are powerful branding conventions.   This radical branding, the brainchild of  handlers and marketing professionals is solely employed to maximize brand value and to move the goods of Me Inc. into the heads and hands of frenzied consumers desperate for an existential connection with something greater then themselves.  The fickleness of consumer capitalism is wholly agnostic.  It never really loves you back.  As a matter of fact it doesn’t love you at all.  Its a cold calculated manufactured creature designed to suggest that its sore purpose in life is to return the love that its user abundantly confers to it. Yet it lasts only until the money runs out.  Its pimp requires these deft street walkers to move on to a new corner where the tricks are more plentiful and bucks much greener.  Ironically free agency begets another type of slavery.  The free agent is shackled to the ball and chain of transactional capitalism.  The soul of the person becomes indistinguishable from that of a soulless corporate entity.  This coalesces perfectly with the Supreme Courts decision to confer the same rights and privileges to corporate entities to finance political candidates.  More and more creeping corporatism is rationalized throughout the body politic as the real bodies and persona’s of persons morph into corporate entities.

The disease is growing too.  In the 3D digital age we deepen these faux connections to our heroes with homey Tweets, real time TMZ coverage, and a befriended status on Facebook.  We get full access to the royal court.  A total submersion within the gone viral digital version of our hero’s carefully constructed virtual world.  We are knighted by the King’s courtesans and receive special discount coupons redeemable at our icon of choice company store.   This special befriended status is good as gold as long as the balance on our credit card doesn’t exceed it limit.

A few years ago Bishop Mark Beckwith delivered a homily on the meaning of icons.   Bishop Beckwith stated that icons were intended to be a prayer aid.  A type of tool constructed of transparent materials so light can filter through them.  This light would reveal an immutable truth  conveyed by the icons subject.  It would remind the prayerful person to emulate the qualities of the figure depicted in the icon.   But that purpose changed and icons came to be understood as objects of  veneration that are endowed with special powers.  Kings and Czars commissioned their finest artisans to create beautiful iconic objects depicting the monarch in communion with saints or apostles to reinforce the idea that divine providence has anointed them to rule the realm.  The common folk and the peasantry would prostrate themselves before the venerated object as the very real presence of a divine sovereign and dutifully pray to it.  A radical transformation occurred and we venerated the object and not the meaning the object was meant to convey.

Thirteen Hundred years ago in Byzantine Constantinople, iconoclasts rose up to smash the graven images of icons within their places of worship.  The icons became venerated objects of debilitating dogma used to control and manipulate people.  We  need to destroy the icons that manipulate and control us.  We must claim back our lives and begin to live more richly and freely by understanding ourselves not as a consumer of things but as a participating person fully engaged in a life that affirms self and service to others.

You Tube Music: Def Jam Icon : Redman vs. Ludacris

Risk; consumer capitalism, alienation, hero worship

 

 

July 11, 2010 Posted by | branding, commodities, culture, marketing, product, psychology, reputation, sports | , , , , , , , , , , , , , , , , | 1 Comment

Goldman Sachs as Social Entrepreneur

Goldman Sachs’ CEO Lloyd Blankfein and his largest investor, The Wizard of Omaha, Warren Buffett , descended from the mystical heights of Valhalla with some startling news.  They were bearing a new mythical golden ring.  As they held the ring aloft they made a bold proclamation.  They would embark on one of the grandest social entrepreneurial programs of all time by offering some of the rings precious power, about $500 million worth, to capital starved small and mid-size enterprises (SMEs).  The 10,000 Small Businesses Initiative will distribute $100 million per year over the next five years to SMEs through Community Development Financial Institutions.

These lords of commerce have heard the cries from endangered SMEs.  In their infinite wisdom Blankfein and Buffet understand that the real economy needs to resuscitate and incubate the critical SME segment as an absolute prerequisite to a vibrant economic recovery.    The buzz about this news in the marketplace ranged from cynical suspicion at one extreme to puzzled bemusement and  ecstatic aplomb at the other.

What motivated Goldman to announce this initiative is an interesting question.  Was it guilt, greed or a sense of corporate social responsibility?  Some suggest it is a master PR move to counter a growing public perception that Goldman Sachs,  the poster child of government favoritism and bailout largess,  has leveraged its unfair advantage to achieve historic levels of profitability.  Thus enabling management to pay obscene bonuses to company employees.  But capital has no psyche,  and half a billion dollars is a tall bill to underwrite absolution for some phantom form of guilt.  True to its nature, capital always  seeks a place where it will find its greatest return.  Goldman and Buffett are casting some major bread on the receding waters of a distressed economy.  As its foretold in the Good Book , doing God’s work will produce a tenfold return.  If the Bible’s math is correct, thats a lot of manna that will rain down from heaven for the shareholders of Goldman Sachs and Berkshire Hathaway.  Looks like our modern day version of Moses and Aaron have done it again.  Leading their investors across the dangerous waters of the global economy to live in the promised land of happy shareholders.

As one of the world’s preeminent investment banks and purveyor of capitalist virtues,  company shareholders must be questioning how Goldman’s managers will realize a return on this investment?  Has management examined the potential corporate and societal moral hazards surrounding the program?  Surely shareholders have asked when they expect to be compensated for this significant outlay of capital.   The desire to realize gain is a more plausible motivator and makes more sense for an enterprise like Goldman and the storied investment Wizard from Omaha.

Its wise to ascribe the best intentions and virtuous motivations to actions that we may not fully understand.  This program should be viewed as a seminal event in the history of corporate social responsibility and social entrepreneurship.  Its important to understand that institutions that practice corporate social responsibility do not engage it solely as a philanthropic  endeavor.  Indeed, the benefits of good corporate citizenship pays multidimensional dividends.  All ultimately accrue to the benefit of company shareholders and the larger community of corporate stakeholders.

Goldman’s  move to walk the point of a capital formation initiative for SMEs seeks to mitigate macroeconomic risk factors that are prolonging the recession and pressuring Goldman’s business.   Goldman needs a vibrant US economy if it is to sustain its profitability,  long term growth and global competitiveness.  Goldman needs a strong regional and local banking sector to support its securitization, investment banking and corporate finance business units.   Healthy SMEs are a critical component to a healthy commercial banking sector.  Goldman recent chartering as an FDIC bank holding company may also be a factor to consider.  This SME lending initiative will provide interesting insights into the dynamics of a market space and potential lines of business that are relatively new to Goldman Sachs.  This initiative might presage a community banking acquisition program by Goldman.  At the very least the community banking sector is plagued with over capacity is in dire need of rationalization.  Goldman’s crack team of corporate finance and M&A professionals expertise would be put to good use here.

Goldman’s action to finance SMEs will also serve to incubate a new class of High Net Worth (HNW) investors.  Flush with cash from successful entrepreneurial endeavors, the nouveau riche will be eager to deploy excess capital into equities and bonds, hedge funds and private equity partnerships.  Healthy equity markets and a growing Alternative Investment Management  market is key to a healthy Goldman business franchise.

Community banks, principal lenders to SMEs are  still reeling from the credit crisis are concerned about troubled assets on their balance sheets.  Bankers can’t afford more write downs on non-performing loans and remain highly risk adverse to credit default exposures.  Local banks have responded by drastically reducing credit risk to SMEs by curtailing new lending activity.  The strain of a two-year recession and limited credit access has taking its toll on SMEs.  The recession has hurt sales growth across all market segments causing SMEs to layoff employees or shut down driving unemployment rates ever higher.  Access to this sector would boost Goldman’s securitization and restructuring advisory businesses positioning it to deepen its participation in the PPIP and TALF programs.

The financial condition of commercial and regional banks are expected to remain stressed for the foreseeable future.  Community banks have large credit exposures to SME and local commercial real estate.  Consumer credit woes and high unemployment rates will generate continued losses from credit cards and auto loans.  Losses from commercial real estate loans due to high vacancy rates are expected to create significant losses for the sector.

Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs.   Its a growing contagion of financial distress.  This contagion could infect Goldman and would have a profound impact on the company’s financial health.

The 10,000 Businesses  initiative will strengthen the free flow of investment capital to finance national economic development and empower SMEs.  It strengthens free market capitalism and has the potential to pool, unleash and focus investment capital into a strategic market segment that has no access to public equity and curtailed lines of traditional bank credit. The 10,000 Businesses initiative  will encourage wider participation by banking and private equity funds.  In the aggregate, this will help to achieve strategic objectives, build wealth and realize broader goals to assure sustainable growth and global competitiveness.  All to the benefit of Goldman Sachs’ shareholders and it global investment banking franchise.

Sum2 believes that corporate social responsibility is a key tenet of a sound practice program. Goldman Sach’s has always been a market leader.  We salute Goldman Sachs’ initiative and welcome its success.

In  September of 2008,  Sum2 announced The Hamilton Plan calling for the founding of an SME Development Bank (SDB).  The SDB would serve as an aggregator of capital from numerous stakeholders to focus capital investment for SME manufactures.   More on the Hamilton Plan can be read here: SME Development Bank.

Risk:  SME, bank, recession, unemployment, credit, private equity

You Tube Music: 10,000 Manaics, Natalie Merchant: Dust Bowl

November 20, 2009 Posted by | banking, corporate social responsibility, Hamilton Plan, hedge funds, investments, off shore, PPIP, private equity, Profit|Optimizer, recession, reputation, reputational risk, SME, sound practices, Sum2, TALF, unemployment | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Day of Atonement: Al-Chet for Risk Managers

YomKippurTNToday is Yom Kippur. It is the Day of Atonement. The Jewish faith marks this day each year as a day to reflect on our sins and shortcomings we have committed during the past year. It is a day of personal assessment. Calling all to examine how we have failed to live a life in conformance to our highest aspirations and ideals. It is customary to recite an Al-Chet confession prayer. The Al-Chet is a confession of a persons past year sinful behavior. It is hoped that this admission of sin leads to reconciliation with the aggrieved and an awareness that helps to establish a pattern of improved behavior in the future.

It is good that we commemorate such a day and use it to a constructive purpose. After all, how many among us are without sin? How many of us have achieved a level of perfection that obviates the need to reflect on how we can improve and make amends to those we may have hurt? To be sure, even the best among us have fallen short of the glory of God. The divine Higher Power that keeps mere mortals rightsized and humble when our egos and perception of ourselves grows too large and burdensome. The need to keep a strong self will from running riot is critical. It is particularly dangerous when a person or corporation is unaware and ambivalent to the collateral damage its actions spawn through the naked pursuit of self interest and ambition. In a sense, God is the ultimate celestial Chief Risk Officer that keeps wanton will in check.

The Day of Atonement is an important day because it is a day of transformation. It calls for self examination and transformation. Once we have learned the nature and extent of how our actions and inaction have negatively impacted ourselves and others, we are called to make amends to set things right. It is a day that requires considered action to improve ourselves so we can become a positive force for change in the world.

Considering the year that just transpired in the financial services industry, I wonder what an Al-Chet confession for risk managers would include. We need a strong dose of atonement so we don’t repeat the egregious mistakes we committed last year.

An Al-Chet for Risk Managers:

I was not strong enough to stand up to my boss

I put selfish gain ahead of ethical considerations

I falsified or hid data to conceal results

I failed to be objective

My risk model was too subjective

I ignored warning signs

I was in over my head

I did not understand all the risk factors

I failed to get an outside opinion

I was beholden to monetary gain

I was victim to group think

I placed institutional interest ahead of ethical considerations

I failed to admit I was wrong

I was not honest with regulators

I was not honest with shareholders

I looked the other way

I failed to act

I conveniently overlooked infractions / irregularities

I made exemptions

I did not understand the depth of the problem

I know there are many more.

Please help me to uncover, understand make right and overcome.

Shalom

You Tube Music Video: Aretha Franklin, I Say a Little Prayer

Risk: compliance, reputation, catastrophic risk, moral hazards

September 28, 2009 Posted by | banking, compliance, credit crisis, culture, operations, psychology, regulatory, religion, reputation, reputational risk, risk management, sound practices | , , , , , , , | Leave a comment

St. Michael Save Us!

Michael_Jackson_an_angel_by_Ice_BeatMichael Jackson is now one with the ages. MJ’s passage from this earth marks the death of an American hero and the birth of an angel or possibly a saint. MJ now joins Elvis and Princess Di to complete a divine celestial trinity.

First there was Elvis, The King. The American dream and the innocence of an age dies way too young. No worries, Col. Parker transforms it into the tragic legend of an unsullied Americana that refuses to die even as its mummified corpse lying in state at Graceland continues to twitch from all the amphetamines old Elvis consumed during his historic run in Vegas.

Elvis, the everyman saint. Rising from the humble estate of a Mississippi delta dirt farmer. Elvis would conquer the hearts of his countrymen with sweet southern charm, an impish smile and an untamable shock of hair that flipped when his hips rocked. His love me tender silky voice had the power to weaken every woman’s knees. Countless men would also be curiously drawn to emulate his persona by adopting the vain King’s more frilly affectations. It was a curious example of socially acceptable homo eroticism in a don’t ask don’t tell and certainly don’t show society.

Princess Di, The Lady of the Lake, would follow Elvis. Her story genuinely tragic because her violent demise was not her doing. Her story truly the stuff out of a very Grimm fairy tale. A more gorgeous Cinderella could not be found. Yet her unprincely prince yearning to free himself from under the shadow of a perpetual queen would flummox his princess bride. It would doom this marriage and force the affection starved Princess into the arms of another. This fairy tale did not end well for the defrocked Princess. Her loyal subjects refused to let this very contemporary aristocrat descend to the pedestrian status of commoner. Her minions jealously guarded the memory of this royal icon. They sought to affirm personal fantasies that attaining royal status, though remote, is a possibility; and that beautiful benevolent monarchs are real people like them who deeply love and identify with their daily trials. Devoted Britoners make pilgrimages to her final resting place that is worthy of Queen Guenevere. Pricess Di is entombed on an island in an ornamental lake known as The Round Oval. The lake is located in Althorp Park’s gardens the ancestral home of Princess Di’s family. The Round Oval is surrounded by a path with thirty-six oak trees, marking each year of her life. Princess Di’s constant sentinels are four black swans that swim the lake amidst water lilies, which, in addition to white roses, were Diana’s favorite flowers.

MJ’s beatification will proceed abetted by fawning fans, a complicit family and entertainment media moguls eager to do large licensing deals to insure that royalties continue to accrue to the King of Pop estate and its agents. His veneration will address the American peoples deep seated need and unending capacity for hero worship. This need is only exceeded by our driving compulsion for instant gratification through gluttonous consumption. For many, this is the principal freedom promised to any and all Americans; an inalienable right to satiate any whim or whimsy money can buy. Nowhere in recent memory do these character deficiencies coalescence so neatly as they do with MJ.

The voracious consumption of culture knows no bounds. Like every other aspect of American life, culture as a commodity is the only culture we know. Radical capitalism has so thoroughly reified itself into the fabric of our everyday life that we find it increasingly difficult to imagine or experience human relations or interactions outside of a commercial transactional exchange. MJ significant buying power purportedly allowed him to bleach his skin, remove a negroid nose, purchase a triptych of white kids, fiance a voracious prescription drug addition and allegedly engage and cover up pedophilia activities.

MJ’s life was the triumph of consumer capitalism. Marketing changed and created MJ and the idea of MJ. From his very first appearance on the cover of Tiger Beat magazine as a member of the Jackson 5, to the ghastly image of his corpse filled body bag being offloaded from a helicopter on its way to the city morgue; MJ was a commercial vehicle, a marketing juggernaut that enriched a multitude of people, fattened his bank account and tormented and robbed his soul.

Yes MJ could have anything and everything money could buy yet he found no peace. This mythic figure created, manufactured and marketed by immutable corporate institutions seeking to seamlessly bind our mind and soul to an existential dream of material opulence in reality is much more the nightmare. It is more akin to imprisonment in a gulag of Walmarts; then the elusive personal liberation tantalizingly dangled by the broken promises of consumer capitalism. MJ’s death truly signals a hair on fire moment for our culture and no metaphor could be more powerful then his Pepsi commercial shoot gone bad.

Our myths instruct us to hold on to our Valium and amphetamine addicted lifestyles. Its the price we must pay to work and acquire the things that hold the illusory promise of freedom. We need heroes to emulate. It fuels our Viagra driven power surges in a queer transference. Its how we escape our daily pedestrian dread. It is how we live to converse with the God’s if only for a few fleeting infrequent moments allowed by the running meters of consumer rapture.

Here we are led to believe that after a heavy day of fighting the power, misogynistic rappers guzzling Christal and lighting Cuban spliffs with hundred dollar bills are the just rewards for speaking truth to power and taking on the man. Madison Avenue business is the creation of virtual mythology.

MJ’s career trajectory perfectly captured the arch of American culture since the Viet Nam war. The perfect antidote to The Black Panthers and Malcolm X, the cutesy Jackson 5 were acceptable Negroes welcomed in all white American living rooms as they stomped on Ed Sullivan’s TV Show. To the final funereal spectacle complete with a homily by Rev. Al Sharpton offering MJ apologetics and the Afro American Hollywood bourgeoisie rolling up to the Staple Center in a caravan of Black Danalis perfectly captured a peculiar resonance of Barack Obama’s America. MJ always at its epicenter. Placed their by the power of Madison Avenue media mavens and blockbuster Tinsel Town agents.

CNN was crowing how this event was about the common folk. Not the stars or glittering sequined gloves worn by MJ pallbearers. Elvis was a Horatio Alger type story. Princess Di let us fantasize about our royalty as we sat in our personal castles of over mortgaged homes cluttered with Rubbermaid artifacts. MJ was evidence of the triumph of marketing and the divinity of packaged consumer capitalism. Look again at the man in the mirror. Let it reveal how consumer fantasy makes every man King and each day a coronation through the availability of fast and easy credit.

Joseph Campbell wrote in The Hero Has a Thousand Faces “Wherever the poetry of myth is interpreted as biography, history, or science, it is killed. The living images become only remote facts of a distant time or sky. Furthermore, it is never difficult to demonstrate that as science and history mythology is absurd. When a civilization begins to reinterpret its mythology in this way, the life goes out of it, temples become museums, and the link between the two perspectives becomes dissolved.

As the world begins its frantic search of Travelocity for deals for a Hajj to the Neverland Ranch, some might recall St. Michael the Arch Angel who cast Lucifer out of heaven. MJ will be St. Michael the Second. It may be an ironic twist of fate that MJ will hold second billing for eternity to an Arch Angel portrayed by John Travolta in the film Micheal. I’m sure his publicists are busy planning a PR campaign to rearrange the celestial order of things.

You Tube Music Video: Gil Scott-Heron and Brian Jackson: Madison Avenue

Risk: culture, capitalism, marketing,

July 30, 2009 Posted by | branding, commerce, commodities, culture, democracy, institutional, manufacturing, marketing, media, movie, pop, product, reputation | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

The Black Knight

Sir Allen Stanford

Sir Larceny-A-Lot

Sir Allen Stanford turns out to be no knight in shining armor. He’s just another greedy creep who thought he was entitled to other peoples money.   Sir Allen might just be another garden variety Ponzi Schemer; but compared to Madoff this guy is a piker.   The theft of $8bn is petty larceny compared to Madoff’s massive $50bn swindle.

It is becoming startling clear that we can no longer view these types of events as isolated incidents. Sir Allen may be this weeks poster child for capitalists gone wild; but the shock and awe of audacious financial crime is becoming a consistent lead story on the nightly news.  Public trust in the financial markets is at stake.  If people cannot trust their financial fiduciary the whole system goes down.

The SEC’s reluctance to act on information concerning Madoff irregularities and the announcement that over 500 public firms are being reviewed for possible fraudulent business practices are raising a public outcry for more vigorous oversight and protection.  The swirling rumors of bank insolvencies, nationalizations and news of  their egregious failure to adhere to basic risk management precepts are turning the skeptical taxpayers  into vocal opponents of the TARP program and any future bank bailouts.

The allegations that UBS marketed a tax evasion scheme to attract over 50,000 US clients to their private banking business with the promise that it would shield them from onerous tax liabilities may be the straw that breaks the camels back.   US taxpayers are struggling from the burdensome pain of high taxes they dutifully pay.   They are confused and frightened by the orgy of government spending and how the financial industry bailouts will effect them.  The credit crisis and the stunning losses people incurred in their retirement and investment portfolios is casting widening doubt about the trustworthiness of the banking system.  Citizens are urging their elected representatives that all financial service providers must come under a microscope of  scrutiny and oversight.  Consumers want assurances that all fiduciaries are sound.  Taxpayers are demanding that regulators insist that financial institutions provide a level of transparency to assure consumers that they are in compliance with all regulatory mandates, have a program of risk management controls and offer proof of an ethical corporate governance program.

The US tax payer has made it clear that they can no longer shoulder an egregious tax burden that continues to finance insolvent financial institutions that failed miserably to manage risk or comply with the barest minimum standards of proper corporate governance.

The allegations that surfaced suggesting that Sanford Financial may be linked to money laundering for Latin American drug cartels through The Bank of Antigua and related banking enterprises in Venezuela and Ecuador is sure to usher in a new era of aggressive enforcement initiatives by regulators.   The practice of  selling worthless CDs to retail investors that promised high rates of interest is the tip of the spear in a sophisticated money laundering scheme.  This will create some added urgency for regulators to conduct an in depth reviews of financial institutions AML compliance programs.  Examiners will aggressively pursue fund managers  to determine that Know Your Customer (KYC), Customer Identification Procedures (CIP) and Politically Exposed People  (PEP) programs are meeting acceptable standards to detect and deter money laundering.  Of  particular concern will be hedge fund complexes with incorporated off shore structures.  To be sure, examiners will liberally interpret and claim jurisdictional nexus on all offshore structures linked to US domiciled funds.  The US Treasury coffers are bare and it will look to collect taxes on any revenue sources it deems as taxable.

Financial institutions need to demonstrate to counter parties,  regulators, SROs and most importantly investors; that they have a sound risk management program in place that protects the funds investors against all classes of operational risk.    Sum2 offers an AML audit program fund managers use to maintain compliance standards  that  demonstrate program excellence to regulators and investors.

You can believe the examiners are sharpening their spears.  Looking to bag a kill and make an example of wayward managers with lax compliance controls.  Be ready, be vigilant and be prepared.

You Tube Video: Moody Blues: Nights in White Satin

Risk: money laundering, regulatory, operations, reputation

February 23, 2009 Posted by | AML, hedge funds, Madoff, off shore, operations, regulatory, reputation | , , , , , , , , | Leave a comment

For the Want of a Nail: Lennar Homes

for the want of a nail

for the want of a nail

Community developer Lennar Homes lawsuit against drywall manufacturers reminds me of the old Mother Goose nursery rhyme, “for the want of a nail.” The rhyme begins with a nail that was not available to affix a shoe to the hoof of a horse. The loss of the nail loses the shoe, which loses the horse, which loses the rider, which loses the battle, which loses the war, which loses the king which loses the kingdom. For the want of a nail is an instructive tale of how seemingly insignificant or minute events can create consequences that escalate into a catastrophic incident that impacts and endangers many.

The Lennar lawsuit is yet another egregious example of supply chain contamination that has recently come to light. The discovery of toxic substances within drywall manufactured in China and used in the construction of Florida homes has prompted the lawsuit against manufacturers and a number of installation subcontractors that purchased the contaminated drywall on behalf of Lennar.

Lennar’s lawsuit alleges that subcontractors it employed to install dry wall, substituted high quality domestic brands with the less expensive contaminated drywall. The subcontractors imported the contaminated drywall from China to save on costs of materials in an attempt to boost profits for their contracted work. The drywall was discovered to contain toxic substances after a number of homeowners began to complain of foul odors, product deterioration and in some cases sickness due to exposure to the contaminated product.

It is believed that the Chinese drywall was found to contain a quantity of dry ash which was used as a filler substance in the manufacturing process. Dry ash is a waste by product of coal fired power plants that are so prevalent in China. The dry ash is known to contain concentrations of heavy metals that are considered dangerous to humans.

This event is certainly unwelcome news for the beleaguered construction and real estate industries. Particularly so in deeply distressed markets like southern Florida. It has heightened the risk profile of all parties involved and could spell catastrophic consequences for some of the involved manufacturers, homeowners, and contractors. This event can also impact the profitability of banks that may be forced to write off non-performing mortgages and construction loans sold to affected homeowners and contractors. Insurance companies may be required to pay off clams for product liability and homeowner policies. Municipalities are also at risk due to this event. Tax ratables and property values are threatened due to property abandonment and the suspicion that toxins have been introduced into the community.

This risk event will require the drywall manufacturers to face severe legal liability. It will impact profitability due to the financial stress of remediation expenses. Most significantly these types of events do severe damage to the company brand and reputation. A great deal of company and product branding is about trust. This types of events compromise the trust of brand consumers. Once that trust is violated it is very difficult to win it back.

Lennar violated its customers trust by allowing its supply chain to be contaminated. This violation of trust will result in financial loss and may create a long term health risk for Lennars customers and their families.

The municipalities that welcomed Lennar with the anticipation that development will serve the citizens of their communities have now been scarred by an ecological hazard. This will continue to haunt the reputation of these towns for many years because it threatens the value of both contaminated and non contaminated homes.

The drywall installation contractors face a high probability of bankruptcy and potential criminal prosecution. This event will fire a deepening distrust of Chinese manufactured products. It will certainly add stress to the delicate political balance of the highly codependent China USA trade relationship. Instigating calls for more protectionism and “Buy America” mantra by American based manufacturers. The prospect of added strain with China is particularly delicate due to China’s important roll in financing government spending through its large purchases of US government bonds. All because some subcontractors wanted to realize a little more profit margin. For the want of a nail indeed.

The unfortunate realization is that this risk could have been prevented. Master contractors need to put in place service and supply level agreements that prohibit the use of substituted materials. Master contractors need to manage supply chains by insisting that all materials used by subcontractors meet quality specifications and are sourced from trusted and thoroughly vetted providers. Adherence to international product quality and testing standards must be ascertained before those are accepted into the supply chain. This is just one aspect of ascertaining weather a supplier meets acceptance criteria into a company supply chain.

The Profit|Optimizer helps manufacturers, developers, contractors and lenders conduct a risk assessment of their supply chain. It is something that many businesses often take for granted yet holds the potential to become one of the most dangerous risks to the financial health and stability of the business enterprise.

Sum2 sells nails. The Profit|Optimizer helps business nail down risks that can deconstruct your business. It is a great set of tools to build profits and construct a healthy sustainable business.

Next time you read Mother Goose “for the want of a nail” to a child remind them to pay particular attention to its sage advise. It may be the first lesson in effective risk management that they will receive.

You Tube Music Video: Peter Paul and Mary, If I Had A Hammer

Risk: supply chain, product liability, reputation risk, ecological

February 7, 2009 Posted by | disaster planning, ecological, manufacturing, product liability, reputation, supply chain | , , , , , , , | Leave a comment

Kashi’s Kismet

salmonella

salmonella

Last night as I was researching the Peanut Corporation of America’s (PCA) peanut paste recall, my wife received an urgent telephone call from our local supermarket. The caller informed us that the Kashi products we purchased were subject to recall. I was a bit astonished by the call for several reasons. The first being notified of the unhappy news that a premium brand product that I so enjoy has the potential to kill me or make me very ill due to Salmonella bacteria. It goes without saying that it was a most bracing experience. I was also a bit bemused about the ability of my local supermarket to track me down to inform me that my favorite breakfast cereal might endanger me. At the very least letting me know that this is no breakfast for champions.

Though this is a positive example of how consumer product data mining and customer tracking business intelligence is employed; the realization that your breakfast eating habits are tucked away in some giant relational database remains a bit unnerving. But that is a different subject for another day.

After checking with the Kashi website the cereal products I purchased were not listed on the recall list. Kashi website lists granola bars and cookies as its only products that are subject to recall. As a committed consumer of the brand I remember when I purchased the cereal a free granola bar was included in the package for product promotional purposes. When I returned home I eagerly consumed the free granola bars. I am happy to report that I have not fallen ill. I’ll have to go back to the supermarket and ask if the non contaminated cereal I still have in my cupboard remains subject to the recall. An interesting product bundling dilemma.

The mechanics and execution of the product recall seems to be effective. The sophisticated use of data mining technologies and the ability of the manufacturer to contact a retail consumer through a digital trail that includes customer loyalty cards, credit card, and product bar codes is pretty impressive.

What is of concern about Kashi and other processed food manufacturers that are dependent on an expanded and complex supply chain is their failure to uncover the risk associated with the supplier. In this case PCA. It is alleged that PCA had a leaky roof that played a role in contaminating the peanut paste. A simple walk through of the facility may have uncovered this risk factor. Certainly if a company fails to perform the most basic facilities maintenance functions (like a leaky roof) odds are that the company has other issues and businesses functions that it is not addressing. This is the cockroach theory. Where you see one there are usually many others. A simple walk through may have revealed that all was not kosher at PCA.

Supply chain risk is becoming more prominent as manufacturers and service providers aggregate components and ingredients from numerous providers to deliver a finished product or service to end user consumers. The implementation of a sound practice program that addresses risk associated with supply chains is a key ingredient for a sustainable business enterprise.

The Profit|Optimizer devotes a section to supply chain risk. All process manufacturers must require suppliers to conduct a thorough risk assessment of processes and functions as outlined in the Profit|Optimizer. The Profit|Optimizer also includes a section on facilities risk. The risk assessment tools offered by the Profit|Optimizer would have uncovered the dangerous risk factors at PCA and may have prevented the fatal and costly release of contaminated products.

The kismet of commercial enterprises like Kashi will continue to be bright so long as the mantra of sound risk management is practiced with more vigilance. In doing so the health and well being of its loyal customers will flower as will the value of its product brands and the sustainability of the business.

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Risk: reputation, brand, product liability

February 4, 2009 Posted by | manufacturing, product liability, reputation, risk management, supply chain | , , , , , , , , , , | Leave a comment

Honda Motors Practices Enlightened Capitalism

Amidst all the layoffs, business closures and shutdowns the hard edge of capitalism is a painful experience far too many people are forced to endure. During times of plenty, the relationship of labor and capital is harmonious and symbiotic. Both parties recognize the value that each bring to the corporate community and each parties enrichment and well being is served by the degree of harmony present in that relationship. During down business cycles management may resort to layoffs to preserve the enterprise. Unfortunately this often causes resentments and hard feelings on the part of workers who have lost the means of earning a living. When workers return to their jobs this can cause problems and hurt an affirmative corporate culture that is critical to maintaining a sustainable business enterprise.

In the face of the meltdown in the automobile manufacturing sector, Honda Motors is one of a very select few that is not resorting to layoffs. Honda Motors known for product quality and leadership in product innovation and business processes is also highly respected for its treatment of employees. Honda Motors places great emphasis on the creation and maintenance of an affirmative corporate culture to sustain profitability and market leadership.

Honda Motors decision to restructure the work force, and give workers a period of paid leave until business conditions improve speaks volumes about how management respects and values the contribution labor makes to the long term sustainability of the enterprise. Any remuneration workers receive during the leave will be paid back to the company with unpaid overtime when the workers return to the production line.

The value of good will on the Honda Motor balance sheet has increased exponentially. The sustainability of an affirmative corporate culture will drive profitability, product innovation and market leadership for the many years to come.

We applaud Honda Motors for this innovative and enlightened response to the current market challenges.

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Risk: sustainability, labor relations, corporate culture

February 3, 2009 Posted by | culture, labor, reputation, risk management, sustainability | , , , , , , | Leave a comment

Peanut Corporation of America

A salmonella breakout that has been traced to peanut products marketed by the Peanut Corporation of America (PCA) is an unfortunate and severe example of a company with poor risk management, weak corporate governance controls and questionable ethical business practices. In most instances poor risk management and corporate governance violations primarily victimizes the company that fails to institute them. In the case of the PCA, unsound business practices has unleashed a deadly viral bacteria into a vast consumer market. Since its outbreak in October the salmonella infection is believed to have claimed the lives of 8 people and has sickened over 500. PCA violations will also cast a long shadow on the vibrant US peanut growers and processing industry.

A brief examination of some of the public disclosures that have come to light concerning the PCA speaks of a telling breakdown in sound risk management practices. These disclosures also hints at potential instances of fraud to cover up lax controls and compliance violations cited by FDA and State of Georgia food safety examiners.

The PCA had been cited for violations and lax operational controls during past inspections by regulatory agencies. Inspectors found evidence of roach infestation and mold in the production and storage facilities. Inspections also revealed that product quality had been compromised due to a degraded manufacturing process and improper maintenance of the operating facility. After bringing this to the attention of company management PCA executives sought out food testing companies that would provide results to indicate that product quality met federal safety standards and were safe to ship.

Utilizing industry standard risk analysis tools like the Profit|Optimizer would have revealed several breaches in sound risk management practices at PCA. Lax operational controls, poor facilities and the evasion of corporate governance practices will likely put PCA out of business due to the damage its actions have done to company product brands and reputation.

Problems and risks associated with process manufacturers like PCA add layers of complexity to determine product risk due to its role as a supplier in an intricate and expanded supply chain for processed consumer food products. The melamine contamination of Chinese milk products and the mortgage backed securities market crisis provide examples of how product liability and consumer risk is leveraged due supply chain complexity. The pervasiveness of products that use the peanut paste manufactured by PCA is very similar in many respects. Cookies, ice cream, crackers and other products are subject to recall. Some of the companies affected by PCA’s contaminated products include premium consumer product and brand marketing companies like Kellogg, General Mills, Jenny Craig, Nuti-System and Trader Joes.

Severe product liability events like this unfortunately also cast aspersions on an entire industry. Associations like the American Peanut Council are most concerned that the poor manufacturing practices and product quality standards exhibited by PCA will reflect on how consumers view the industry as a whole. It is a valid concern for the industry association and it must demonstrate to the regulators and consumers that its membership is committed to sound manufacturing practices, product quality and corporate governance excellence. This is not a PR problem. Nor is it a problem born from an industries anathema to regulatory control or a problem unleashed by some renegade industry member. Industries and their representative associations must also help address sound risk management and corporate governance excellence as a cultural issue that is endemic to its membership. Then industry excellence becomes synonymous with product quality and consumer satisfaction.

In all the FDA uncovered 10 violations and has published its report and carries a full listing of recalled products and other resources on the FDA website.

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Risk: product, operations, regulatory, reputation

January 29, 2009 Posted by | associations, manufacturing, operations, Peanut Corporation of America, product liability, regulatory, reputation, risk management, supply chain | , , , , , , , , , , , , | Leave a comment