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jerryking : downside_risks   5

Global Britain or globaloney - Bagehot
Mar 15th 2018 | The Economist | Bagehot.

Mr Tugendhat’s committee worries that “global Britain” cannot be the basis of foreign policy because it is little more than an “advertising slogan”. This columnist thinks the problem goes deeper. Global Britain is three badly thought out ideas rolled into one....
The first is that, thanks to its long history as a trading nation and imperial power, Britain is an irreducibly global country.....The second idea is that being global means embracing emerging markets. Since 2000 these have accounted for more than 60% of the world’s economic growth. The European Union is the economic equivalent of a “legacy system”: locked in the past, overburdened by entitlements and regulations, terrified of the creative destruction at the heart of capitalism. The emerging world, by contrast, is a bubbling cauldron of new opportunities and new consumers. ....The third idea is that “global Britain” means the Anglosphere. This embraces countries around the world that share a common culture because they were once part of the British empire.....The phrase “global Britain” is well intentioned, designed to send a message that Britain is not withdrawing from the world by leaving the EU. It remains open for business, active on the world stage, bouncily cosmopolitan. But Britain needs to do more than remain open for business. It needs to work out ways of engaging without overstretching its abilities and of embracing globalisation without forgetting that it has downsides as well as upsides. Talking globaloney isn’t going to help.
Brexit  delusions  downside_risks  EU  fallacies_follies  globalization  overstretching  slogans  United_Kingdom  upside  world_stage 
april 2018 by jerryking
Flood. Rinse. Repeat: The costly cycle that must end
May 07, 2017 | The Globe and Mail |GLENN MCGILLIVRAY, managing director, Institute for Catastrophic Loss Reduction

Once again, homes located alongside a Canadian river have flooded, affected homeowners are shocked, the local government is wringing its hands, the respective provincial government is ramping up to provide taxpayer-funded disaster assistance and the feds are deploying the Armed Forces.

In Canada, it is the plot of the movie Groundhog Day, or the definition of insanity attributed to Albert Einstein: Doing the same thing over and over again and expecting a different result.....First, a homeowner locates next to the river, oftentimes because of the view (meaning a personal choice is being made). Many of these homes are of high value.

Then the snow melts, the ice jams or the rain falls and the flood comes. Often, as is the case now, the rain is characterized by the media as being incredible, far outside the norm. Then a scientific or engineering analysis later shows that what happened was not very exceptional.

These events are not caused by the rain, they are caused by poor land-use decisions, among other public-policy foibles. This is what is meant when some say there are no such things as natural catastrophes, only man-made disasters.

Finally, the province steps in with disaster assistance then seeks reimbursement from the federal government through the Disaster Financial Assistance Arrangements. In any case, whether provincial or federal, taxpayers are left holding the bag.....So what is the root of the problem? Though complex problems have complex causes and complex solutions, one of the causes is that the party making the initial decision to allow construction (usually the local government) is not the party left holding the bag when the flood comes.

Just as homeowners have skin in the game through insurance deductibles and other measures, local governments need a financial disincentive to act in a risky manner. At present, municipalities face far more upside risk than downside risk when it comes to approving building in high-risk hazard zones. When the bailout comes from elsewhere, there is no incentive to make the right decision – the lure of an increased tax base and the desire not to anger local voters is all too great.

Reducing natural disaster losses in Canada means breaking the cycle – taking a link out of the chain of events that leads to losses.

Local governments eager for growth and the tax revenue that goes with it need to hold some significant portion of the downside risk in order to give them pause for thought.
floods  catastrophes  natural_calamities  design  insurance  public_policy  disasters  relief_recovery_reconstruction  sustainability  municipalities  skin_in_the_game  disincentives  Albert_Einstein  complex_problems  land_uses  moral_hazards  man-made  hazards  downside_risks 
may 2017 by jerryking
Giving Great Advice
Janaury 2008 | HBR | Interview of Bruce Wasserstein by Tom Stewart and Gardiner More.

HBR’s editor, Thomas A. Stewart, and senior editor Gardiner Morse
spent many hours at Lazard and interviewed Wasserstein, setting out to understand how he creates value as a manager, as a deal maker, and as a counselor to CEOs. How does he attract and
manage talent, build and sustain knowledge businesses, size up companies and industries, and craft advice?

Wasserstein describes his approach as discovering whether a deal or strategy “makes sense.” Such sensemaking seems to underlie every move he makes, and it has paid off handsomely. Following is an edited presentation of HBR’s conversations with Wasserstein...first to execute deals really well and then to market that track record.

How do you develop individual talent? The idea is to create a hothouse where young talent is nourished by our culture and people are encouraged to think creatively, think deeply,
think about the long-term client relationship—but above all, think. I want them to reflect on what they are doing and why, and then wonder,“Can we do better?”

Talk about the advice business. What are CEOs looking for as you’re helping them understand the landscape? What do they
need that you’ve got? The point of advice is to create value. The
first thing in that effort is not to assume the banker knows more than the client. The second thing is to remind the CEO that corporations have to change in order to prosper and that inaction isn’t prudent—it’s radical. What we can do is help the CEO think through an array of options, partly by asking
the necessary questions, but also by inserting some very practical observations about the effects of specific decisions.
Good advice is at least as qualitative as it is quantitative....On the other hand, there’s the more qualitative part of the advice. This strikes me as being an underdeveloped side of most investment-banking relationships. Knowing the characteristics of the industry and possible consequences of a deal comes from having seen what’s happened in many companies and industries over time. So, for example, you might say, “Look, you need a very different mentality to manage this type of business than your other businesses. You have a process-oriented mentality, but you need a more market-oriented approach. Are you confident that you’re going to be able to keep the number two guy in the company you’re acquiring? Because the number-one guy will probably leave.”

Deals that make sense. Can you elaborate on that? Law school taught me to focus on dissecting premises. Anyone who’s a good logician can build an argument on just about any premises.
The argument may be taut, but the premises may be faulty. When we do deals, I always ask, “Are the premises sound? Is the risk exposure worth it for this particular company, and have
I protected my client’s back?” We proceed by identifying and evaluating qualitatively and quantitatively the key elements of risk in the transaction—overall economy risk, strategic
risk, operating business risk, financing risk, people risk. Similarly, you need to fully understand the upsides. What are the opportunities in cost cuts, synergies, internal development,
additional investments, or revenue enhancement? It’s useful to apply all the paraphernalia of mathematical science in an analysis, but focusing on the sense of things is a much better use of time. Part of determining the sense of a deal involves understanding the macroclimate, the broader context, which I think gets too little attention.

...We think of each deal in terms of a flow chart with a series of black boxes. Each box represents a facet of the deal—for example, valuation, financing structure, approach to the other party, negotiating tactics and deal process, taxes, legal structure, contracts, market reaction, and regulatory hurdles.
advice  argumentation  Bruce_Wasserstein  contracts  cost_of_inaction  dealmakers  deal-making  downside_risks  financial_advisors  financial_risk  howto  investment_banking  J.D.-M.B.A.  Lazard  logic_&_reasoning  M&A  market_risk  mergers_&_acquisitions  operating_risk  problem_solving  product_risk  risk-assessment  synergies  team_risk  upside 
july 2012 by jerryking
How to be wise before the event
March 9 2009 | Financial Times | By Stefan Stern.

Restraint is back in fashion in these recessionary times. People have lost their appetite for risk.

But hang on a minute. No risk will mean no reward. You need new markets and customers to grow, and that means taking steps into the unknown. I doubt that anyone will be suggesting, in this newspaper’s new series of articles on the future of capitalism, that risk-taking should be abolished.

Bad risk-management helped get us into the current mess. It is vital that we learn the right lessons about risk from the crisis. What are they?

The new edition of Harvard Business Review contains a lucid piece of analysis from René Stulz, professor of banking and monetary economics at Ohio State University’s Fisher College of Business. While his principal focus is on the financial sector, the diagnosis will be helpful to managers in any business or organisation.

Prof Stulz describes six ways in which risk has been mismanaged. First, there has been too much reliance on historical data among today’s decision-makers. Extrapolating from the past can provide, at best, only partial guidance for the future. Financial innovation has created a new world. No wonder some managers were unprepared for the calamitous fall in asset prices and demand. This collapse was unimaginable to anyone basing their thinking on post-war performance alone.

Second, narrow daily measures – in banking these are known as “value at risk” measures – have underestimated the risks that are being run. The assumption behind a daily measure of risk is that action can be taken quickly (through an asset sale) to remove that risk. But, as the current crisis has shown, such rapid moves become impossible when markets seize up.

Third, knowable risks have been overlooked. Managers who work in silos may appreciate the risks that they personally are exposed to. But they may not see how risks being run elsewhere in the business could affect them too. Someone – a chief risk officer? – needs to track them all.

Fourth, concealed risks have been overlooked. Incentives have proved to be particularly dangerous in this regard. Some traders and lenders may have enjoyed taking risky decisions that in the short term appeared to be delivering well for them and their organisations. But they had no incentive to report any downside risk. And unreported risks tend to expand.

Fifth, there has been a failure to communicate effectively. It is dangerous, Prof Stulz says, when risk managers are so expert in their field that they lose the ability to explain in simple terms what they are doing. The board may develop a false sense of security by failing to appreciate the complexity of the risks being managed.

Last, risks have not been managed in real time. Organisations have to be able to monitor fast-changing markets and where necessary respond to them without delay.

Prof Stulz offers a useful technical analysis. But a true understanding of risk also requires a maturity of outlook, an ability to see the big picture, and deep experience. This last is a rare commodity: impossible to fake and acquired only over time.

In a new McKinsey publication called What Matters, the 90-year-old investment manager and author Peter Bernstein offers some sober insights. “What is risk management all about anyway?” he writes. “We use the words as though everybody understands what we are talking about. But life is not that simple. Risk means more things can happen than will happen – which is a fancy way of saying we do not know what is going to happen.”

Mr Bernstein’s central point – not revolutionary, but unarguable – is that downside risks must be assessed rigorously. Someone old enough to remember the Wall Street crash is probably worth listening to right now.[JCK: elder wisdom]

“Nothing is 100 per cent sure,” Mr Bernstein says. “While a 95 per cent probability is statistically significant, that still leaves us in the dark about the remaining 5 per cent; we may decide to accept that uncertainty and bet on the 95 per cent sure thing, but there is still a possibility of being wrong.

“The crucial question to ask is, ‘What would be the consequence if that 5 per cent chance comes to pass?’ ”

Welcome to the less exciting but more soundly based era of calculated risks. For the foreseeable future, business leaders will be trying to be wise before rather than after the event.
beforemath  business  communicating_risks  downside_risks  elder_wisdom  false_sense_of_security  fast-changing  financial_innovation  hidden  historical_data  management  McKinsey  overreliance  Peter_Bernstein  recessions  real-time  risks  risk-assessment  risk-management  Stefan_Stern  the_big_picture  VaR  what_really_matters  wisdom 
may 2009 by jerryking

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