Today 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.
You Tube Music Video: Aretha Franklin, I Say a Little Prayer
Risk: compliance, reputation, catastrophic risk, moral hazards
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
Bankers are catching some major heat. Senators are screaming at the money lenders in an effort to have them explain what the banks did with the $350bn they gave them in the first round of TARP funding. Now that the second $350bn tranche of TARP funds is about to be dispersed, the politicians want assurances that a good portion of the money will find its way into the economy in loans to small & mid-sized enterprises (SME). All believe that this is critical to halt the specter of the deepening recession.
If it wasn’t so serious it would be funny. Banks are getting yelled at by the politicians for not lending. Angry constituents are beating up the politicians for giving the banks the bailout money in the the first place. They complain that the Treasury Department is giving banks taxpayer funds at a 1% interest rate that banks in turn lend back to taxpayers at interests rates that are considerably higher. To close this circle of pain, consumers are getting nasty calls from their bankers and debt collection agencies, threatening them with punitive actions if they don’t pay their mortgages and outstanding credit card balances. Everyone is a debtor in this comedic cycle of pain.
Now that banks are flush with cash from the second round of TARP funding they must start lending and SMEs need to start borrowing. Its that simple. What is not simple is breaking the stalemate of confidence that exists between lenders and borrowers. Risk aversion is extremely high. Banks are very concerned about adding credit risk exposures to commercial loan portfolios. A recession creates enormous market challenges for SMEs. Bankers need to develop an enhanced sense of confidence in the management and business prospects of an SME before it will extend credit.
Both lenders and borrowers can come together in a shared understanding if they are willing to engage in the deeper work that is required by the new business realities. SME managers must be aware of the business and risk management practices that bankers generally look for when assessing credit worthiness. SMEs must be able to demonstrate to lenders that they are committed to sound risk management and corporate governance practices. SMEs must also be prepared to meet transparency requirements of banks with honest and timely disclosures.
Bankers actively seek SMEs that are run by focused and capable managers. SMEs that can demonstrate effective risk management skills and an awareness of the challenges and opportunities present in their market will find that bankers are more then willing to extend new credit facilities to them. Bankers will have greater confidence in these SMEs if they understand and believe in the SME business model. Bankers lend with confidence when they understand how businesses can generate sufficient cash flow and profits to pay back loans. Bankers need confidence that credit risk is being mitigated. SMEs enhance banker confidence that they are a good credit risk by demonstrating a strong risk management and corporate governance culture.
Fortunately there is tool that bankers and SMEs use to build mutual understanding and trust. The Profit|Optimizer helps to generate the confidence needed to help banks lend capital and SME to effectively deploy it.
Get the Profit|Optimizer and confidently be a lender, be a borrower and break the cycle of pain to get our economy going again.
You Tube Video: Liza Minnelli, Joel Grey Cabaret, Money
Risk: credit, market, small business
What are Sound Practices?
Sound practices are a set of standards and controls that mitigate numerous risk factors in the corporate enterprise. Sound practices must address corporate governance, operational and market risk factors, regulatory compliance, corporate citizenship, and stakeholder communications within a set of defined expense ratios.
James Wolfensohn, former President of the World Bank stated, “Corporate governance is about promoting corporate fairness, transparency and accountability.” Sound practices are a necessary prerequisite for effective and ethical corporate governance. Businesses must accept its precepts and clients and investors must demand compliance, ethical trading principles, honest and timely disclosure, operational integrity and a full commitment to its implementation and adherence. Effective corporate governance practices maintains the faith of investors and provide clear measures of transparency, accountability and performance measurement of business managers and owners.
The implementation of a sound practices program is a powerful value creation tool. A sound practices program provides investors and creditors an enhanced level of confidence that operational risk factors are minimized and other classes of risk are being monitored and controlled. Corporate and transactional transparency and shareholder disclosure is assured. Investor confidence and a more thorough understanding of a corporations strategy and risk characteristics will be the result of a sound practices program.
The sound practices program advocates the delivery of reports, analysis tools and management compliance statements to investors and corporate stakeholders through accessible media channels. All communications should support a stated level of transparency for investor disclosure. Investors should expect timely disclosure of corporate risk factors and other events pertinent to corporate performance, profitability and potential risk events and factors.
Brand Building, Regulatory Compliance and Best Practices
Sound practices require that regulatory compliance programs be embraced as a brand building exercise. Corporations that approach compliance by implementing best practice solutions will mitigate reputational and regulatory risk, attract high end clientele, and command premium product margins.
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.
You Tube Video: June Carter Cash & Johnny Cash, One Piece At A Time
Risk: sustainability, labor relations, corporate culture
“The more things don’t change, the more they stay the same.” This quote is worthy of becoming a Yogism if it is not one already. The great American philosopher, Yogi Berra could have opined these words about the degree of change the new Obama Administration is bringing to the art of governance. Fresh off the trivial embarrassment of the new Treasury Secretary Tim Geithner’s forgetfulness to pay taxes, we are now presented with the unsurprising news that Obama’s nominee for Health and Human Services Secretary Tom Daschle failed to pay taxes on various forms of income and gratuities. He has made up this slight oversight by writing a check for a cool $140 G’s. That is a lot of oversightedness.
Obama’s promise to bring change to governance looks suspiciously like the old ways of governance. The installation of a Treasury Secretary that is not aware of his tax liability is most disturbing. More disturbing is Tom Daschle’s nomination as a cabinet secretary charged with reforming a broken health care system. In that position Daschle will be responsible to fix a health care system that has been hijacked to serve the special interests of commercial providers. That will be a most difficult task for Daschle because most of the income and honorariums he failed to declare came from the very same special interests the new Health and Human Services Secretary will need to dislodge from gorging themselves at the money troughs the current health care system richly confers. Insurance companies, HMO’s, and other commercial health care service providers fed Mr. Daschle a steady stream of income since his departure from the Senate two years ago. Most ironic was the provision of a limousine and chauffeur to Mr. Daschle by a private equity firm. Mr. Daschle gives real meaning to the term limousine liberal.
You can’t make this stuff up. We criticized Republicans because of their hypocrisy concerning their self professed commitment to integrity and family values only to witness a parade of GOPers getting caught in extramarital affairs, lying to grand juries and gay sex scandals. The democrats ask Americans to pay taxes to serve the needs of the common folk and working people but take every opportunity to avoid reaching into their own pockets to pay their fair share. The disease of exceptionalism and a deep sense of entitlement is a pandemic that crosses the isle and has thoroughly infected the heard of elephants and donkeys that lazily graze within the people’s halls of government in our nations capitol.
You Tube Video: Mike and Angelo, Life Is So Peculiar
Risk: Health Care System, governance
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.
You Tube Video: Dizzy Gillespie’s Big Band, Salt Peanuts
Risk: product, operations, regulatory, reputation
Credit Redi is a company sponsored blog of Sum2. The purpose of Credit Redi is to help small and mid-size enterprises (SMEs) protect and improve their ability to access credit and equity financing from banks , shareholders and other funding sources.
Sum2 is dedicated to the commercial application of sound practices. Our sound practices program and products address:
- corporate governance
- risk management
- stakeholder communications
- regulatory compliance
Sum2 believes that all enterprises enhance their equity value by implementing a sound practice program. Sound practices are principal value drivers for corporate and product brands. Practitioners are awarded with healthy profit margins, attraction of high end clientele, enterprise risk mitigation and premium equity valuation.
Sum2 looks forward to helping you address the pressing challenges of the current business cycle.
You Tube Video: Herb Alpert and the Tijuana Brass, Work Song
Schulte Roth Zabel’s (SRZ) Annual Private Investment Funds Seminar is the kick off event of the year for the AIM industry. In years past it was an event that was full of bravado from an industry flush with great expectations and giddiness over compensation levels that rivaled a small country’s GDP. This years event had more circumspection then bluster and more reflection on how to fashion a considered response to industry challenges squarely in the vortex of the market meltdown.
The shocking transformation and radical reconfiguration of the capital markets industry is underway. In the wake of the Lehman bankruptcy, Bear Stearns merger, market crashes, credit crisis, bank insolvency, recession and lastly the coup de grace of the Madoff scandal put these intrepid wealth managers through a trying year.
Myriad challenges and crises tested many firms management acumen and forced managers to work extra hard to earn that 2 and 20. With hedge fund closure rates expected to approximate 25%-45% this year, the industry is confronted with enormous challenges. The excess capacity in the industry, heightened regulatory oversight, liquidity constraints and elevated client risk aversion will foster market compression and a dramatic alteration in market dynamics. The well managed, well positioned, well focused and well capitalized funds will thrive on the volatility. Uncertainty is always the mother of invention and the best and brightest of the breed will no doubt find numerous opportunities amidst the massive market dislocations currently underway.
SRZ a leading legal firm servicing the industry effectively laid out an industry battle plan to address many of these acute challenges. In the Crisis Management breakout session the panel offered an interesting metaphor of a hedge fund as an intricate and complex ecosystem. The topology of a fund complex is comprised of many parts that at times may have contradictory and competing interests.
The Crisis Management session conducted a quarterly review of market events that occurred in 2008 as the capital markets deteriorated and the credit crisis deepened. The panels review was an instructive exercise on how managers need to constructively engage problems with an intentional risk management program and how it affects each stakeholder in the hedge fund ecosystem. The principle objective was determining the best course of action to either save the fund or effect an orderly liquidation of the investment partnership. In all instances the strategy needed to consider how to serve the greatest good for all fund stakeholders. SRZ offered attendees a brilliant crisis management game plan for fund managers. It was one of the better presentations on risk management that I have ever attended.
The general session was also very interesting and engaging. The central theme was that hedge funds are under extreme liquidity pressure. The drivers are distressed portfolio valuations, counter-party deleveraging, risk aversion in the markets, market liquidity and increased redemption pressures from investors. SRZ has developed a series of innovative redemption strategies it calls gates. The gates are designed to protect the level of assets under management by controlling an orderly outflow of capital so as not to endanger the overall liquidity and asset level of the fund. SRZ again shows why it is the leading player in the space by offering innovative solutions to industry needs. A great example of a market leader demonstrating leadership by offering innovative product development solutions.
The overall tenor of the conference reminded me of the construction of the Maginot Line. In years past investors were eagerly throwing money at hedge fund mangers to get a slice of the alpha pie. Today hedge fund managers need to build sophisticated battlements to keep the assets of the investment partnership under their control. In a sense the industry as moved from an offensive posture to a defensive one. SRZ is assisting its hedge fund clients to create a defensible business structure that will protect the long term sustainability of the fund and ultimately serve the greatest good of the funds partners and stakeholders.
During these times of extreme market duress tactics and strategies must be employed to protect the fund from excessive redemption runs that would ultimately serve to create a self fulfilling prophesy of liquidation.
Clients who have access to a war council of professionals like SRZ should be well suited to engage the battles they will encounter in the coming year and survive to enjoy the peace and spoils won during the next business cycle.
You Tube Video: Edith Piaf, Mon Legionnaire
Risk: market, credit, legal, reputation