Documentation is an overused word

Documentation is an overused word. What does well documented mean? It is not a thousand page manual. It is what you get nowadays in the best widescreen tv instructions. An easy to get going manual (or page) and a longer manual. The provison of just a longer one is not about commuincation but obfuscatuon. Bear this in mind when people talk about well documented.

Documentation also should not be a very expensive textbook unless that is what you want… to pay for. However it may be cheaper to employ someone who understands it.

Risk management is rubbish...

Is risk management rubbish at prevention of future risks? What are the major risks facing financial concerns? Unknowns. What are the unknown unknowns? You may have to use your imagination in any environment and those who predict something are not always that great unless they can demonstrate significant profits from the course they have taken away form orthodoxy. However when orthodoxy goes wrong like with over-sophistication, no-one ever seems to spot it soon enough.

Let’s flesh this out. Arguably one of the biggest operational risks is caused by over-sophistication or in old-fashioned English being “too clever for yer own good”. Companies and managers (like Governments) are far too clever and sophisticated in doing things but eventually it will end in tears as either the systems can’t cope, aren’t properly documented, staff shortages and even sabotages or inexperience, excessive staff turnover and loss of the key intellect and other staff etc may mean for instance the pricing does not work, the derivative is disastrous etc
Documentation is only any good if someone else understands it and can be bothered to make that effort. So a thousand page manual is in theory good documentation. However in practice it is a waste of time as who will read it and remember it.

Risk management is poor as they need to be fully integrated with the Audit Function so that everything is thoroughly and regularly checked and understood. This is more so when companies are involved in joint ventures with financial concerns. The financial concerns should have the expertise (apparently) and the company pays accordingly. Also both parties should be handsomely rewarded. But as we know experts and intellects are not guarantees of success all the time.

Monitoring does pick up many faults…but will it be too late?

Internal Audits need to be more pro-active and thorough. The system’s supposed to do this and it will not always be enough to spot check a few things.

Talking only of mistakes, They happen but the secret is to make ones that don’t matter too much. For instance typos are a nuisance here but unemployment vs. in employment is a huge typo (which I nearly made once in an e-mail) and form vs from is forever happening.

Perhaps one way of reducing risk is to bring back the secretary!

short term gain, forever pain?

Auctions by government are great short-term but long term are bad news. In the United Kingdom and Germany etc, government orthodoxy was to sell off 3G licences to the highest(?) bidder. As a consequence, there is a huge surge in income short-term for the State but near or actual bankruptcy for a number of bidders. This has benefits…others can acquire assets cheaply and introduce efficiencies as workers have already been sacked etc
Clearly governments encouraging risk-taking is probably not popular these days, as banks will tell you.
However the maths are do the short-term proceeds exceed the present value of the long term additional revenue raised by making the granting of licences etc less onerous. For instance how does increased corporation tax and arguably indirect taxes compared to losses leading to reduced or no corp. tax for a longer period?
The plundering of pension funds in the UK by subtle taxation may have saved the fund managers from being blamed for not producing good returns in the stock market. The orthodoxy of Equities investment may need to be rewritten like that of Property.

Bright people

The challenge facing all big businesses is how to use bright people, no matter what their status. Apparently there are lots of them around but their enthusisam may be on the wane. Bright people do not neeed qualifications to understand most things but will of course need to learn things from people who understand them. Now that is the snaf for business
We do not understand as much as we would like and thus find it difficult to communicate what we do not understand to others. Also intimdation is a tactic used by those who think they understand, unwittingly, to those who think they should understand.

So how does management work?

Professionalism - still a term of abuse

I was pondering how professionalism should rightly become a term of abuse. Professionalism was always something associated with the Banks in the UK. If anyone used the word professional instead of the word competent they were typically in financial services and regarded it as a virtue. Also, the major banks in the UK and around the world which have suffered and even gone bust under the Global Financial Crisis were run professionally. That statement is a fact. They may not have been run successfully or effectively but they were run professionally.
Now professions are looking for people they can blame for things which have gone wrong. Any professions which talks about managing risk need to hold their heads in shame and take some responsibility for the mess. It will not happen of course.

The persecution of those in charge of the Banks at time of bailout has been silly, nasty and not based on the examination of facts. However if you are angry why should rational thought matter anyway. As mentioned previoulsy, you can blame everyone from the Government, the UK & EU Regulators, Sir James, etc Personally, I would put Andy Hornby near the bottom of the list although he overdid the work/life balance behaviours. I can’t bide people who say things like work/life balance when they read big documents relevant to their business on their holidays. Nevertheless Boots shareholders will confirm the man’s a Havard business genius

Regulating Models?

It is clear that no one seems to fully understand models apart from their builders. If LTCM with its Nobel Prize Winners can go bust then anyone can. I have to chuckle when everyone consistently forgets that the FSA was never a zero default regulator and also how the insurance industry in the UK is to copy the Banking Regulation system. Regulating capital by making inferences about the quality of risk management and models is actually daft insofar as it should be purely about senior management. Good management in insurance does not necessarily require good models but ability to use the models if they exist and how to cope if they are not reliable (ie worse than not existing)...
The daft thing about Basel II is the assumption that mortgage lending is much better risk than unsecured lending. It is different but it is not obvious how much better!

RBS and HBOS the final word?

This blog summarises more possible reasons for their demise. It is still not clear which problems were cyclical ie normal in the downturn element of the economic cycle and which were responsible for their failure…was it bad lending, demise of Lehmans etc

How about these reasons!
Lloyds failing to take over Abbey.
This would also have made it impossible for Lloyds to take over HBOS and not get into their current mess.
HBOS forcing RBS to discontinue its relationship with Santander. I would guess that Santander held RBS in check at times and so Santander was the only succesful purchaser of a part of Fortis.
Good financial modelling or is that modellers? Brainy and/or over-qualified people usually only make big mistakes which no one else ever spots until its too late if at all. LTCM again! Once modelling becomes the norm, people try to be too clever.
And of course ^_^ once RBS stopped being known as RBoS.