Risks Of Sound Risk Management – Part 1

It has been slight over a month since I last wrote my 99th article. As I pondered the subject of my 100th article, I agonized over the topic that would grace the 100th writing, as I thought that the number symbolized something special. During my pondering, I realized that there is nothing significant in the number itself. Although we tend to hear the centennial being a major milestone – such as the 100th episode of a long running TV show, the first 100 days of the Presidency, etc. – its significance has largely lost its meaning in the today’s “do it now” society where a story that occurred more than a week ago is no longer news but trivia.

This is also true in the realm of business where “what have you done for me lately?” attitude is prevalent. In this environment of corporate upheaval, continual job cuts, economic uncertainty, and senior management lost in a myopic miasma of “try everything to stem losses” school of management, the risk managers are especially in dangerous waters as they have to try to bring reason and sanity to the this corporate environment.

As a risk manager, I have always practiced the following rules:

1. Never compromise my integrity. This means that that while the allure of the brass ring is tempting, a risk manager’s responsibility is directed to ensuring that the organization is abiding by all requirements as set forth by law, regulations, and its own policies and procedures. Staying your course in not compromising one’s integrity does not win you any favors with those who cut corners and operate openly in the interpretive gray areas. However, the risk manager is charged with the sacrosanct responsibility of being the beacon of rationality in face of blind greed.

2. Don’t sugar coat the truth. In the corporate world, the managers are in their position for a reason. They should be mature enough to accept the facts and consequences of the facts without the need for circumlocution. However, good business practice is to recommend choice of action plans to the manager. This way, the risk factors are properly “actioned” and potential losses minimized or even mitigated.

3. Watch out for unscrupulous managers. This is difficult to do, as most of these managers will not be transparent in their mendacity. However, if they arrived at their station by trickery or deception, then these unscrupulous individuals, who fear being caught by a diligent risk manager, will make the risk manager’s job difficult. Knowing this, tread cautiously as these people may have supporters in upper management.

4. Incompetence is throughout, so don’t be too efficient. Now, this seems counterintuitive and possibly a contortion of logic. However, this is a vital point that most risk managers fail to keep in mind, including yours truly. By incompetence, I mean those individuals whose job functions are antitheses to organizational profitability but perform them very well, to the detriment of the organization. The saddest aspects of incompetence come when an entire unit is happily doing work that other unit/units will have to undo.

When joining an organization, one is given a grand overview of the organization’s principals. This is especially true when joining a Fortune 50 company or an elite financial institution. However, a risk manager needs to realize that there are people of incompetence in all organization, even in the best organization. And the incompetence exists at the top. Take the case of Charles Prince of Citigroup when he uttered the now infamous statement: “As long as the music is playing, you’ve got to get up and dance,” In the immortal words of Dr. Seuss, Mr. Prince “said what he meant and meant what he said.” He honestly believed in his statement and stuck with it, even in the face of blatant fact to the contrary.

So, what is a risk manager to do? Firstly, don’t be a hero. A risk manager or a team of risk managers cannot fix such a process. Those who try are labeled Don Quixote or even worse. At best, the risk manager’s effectiveness is questioned. Now, this was very difficult for me to turn a blind eye to a group that cost millions in operational cost to the firm and it cost me my job. While I do not regret my actions, as I followed my first rule of never compromising my integrity, I caution other risk managers to seriously weigh their personal financial risks and rewards before acting against established incompetence.

5. Add value using dollars and sense (practical sense). Corporations toss around “value-added” a lot in their stated principals. This is also true in their risk management units. However, most people do not truly understand what “value-added” means or even how to enact it. Presenting a month-old risk report to senior management is not “value-added.” Rather, it is value lost, as numerous highly paid managers are forced to attend an hour-long meeting to comply with Basel II accord. Any action taken post event is not valued-added.

The value addition comes from two main practices: (a) concrete and practical preventative action plans that the business can implement and (b) identifying process improvements that reallocates existing workforce to a more effective (and profitable) use within the organization.

I will follow up later on these points; after all, I do want a rapt audience. So, enjoy the weekend and look forward to more insights and risk analyses.

Regards,
Ed Kim
Practical Risk Manager

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Risks Of Oil Price Optimism

The oil price fell by more than $3 from outrageous $130 per barrel to I-still-can’t-believe-it level of just below $129 per barrel. However, based on the media, it would seem that the camel’s back had been broken and we would be seeing more ‘reasonable’ prices shortly.

CNNMoney had this to say today in its report: “"You usually see prices bid-up before the holiday," Stephen Schork, an oil industry analyst and publisher of the Schork Report. "Today we're seeing some of the air let out of the balloon." If the market follows its typical seasonal pattern, Schork thinks crude's "highs have been put in." Though he added that the market has seen "a tremendous amount of support" and the seasonal pattern may not hold this year.

USAToday was also very optimistic in its article, which it titled “Pump prices may have peaked.”

While it is nice to see oil prices coming down a bit from profit taking due to concerns about slowing U.S. economy, it is not indicative of the change in the direction of the price of oil or gasoline. This is prudent to note, as we are now about to enter the hurricane season. If a major hurricane hits of even skirts the gulf coast, the production of gasoline and oil drilling in the gulf will be disrupted, causing a spike in oil and fuel prices once again.

National Oceanic and Atmospheric Administration (NOAA) is forecasting an active hurricane season in 2008 with up to nine hurricanes in the Atlantic Ocean with five of them being major. While NOAA had been predicting more hurricanes in the past two years than actual, there were still six hurricanes in 2007 (out of 10 that NOAA forecasted) and five hurricanes in 2006 (out of nine that NOAA forecasted).

More signs that the 2008 hurricane season may have a substantial impact on the oil and fuel prices comes from AccuWeather.com, Colorado State University, and CSU, according to Bloomberg: “AccuWeather.com and Colorado State University both said the 2008 hurricane season, which runs through Nov. 30, would be more active than usual.”
Additionally, CSU “said both the East Coast and the Gulf of Mexico coast, home to dozens of oil and gas rigs, have a 45 percent chance of being hit by a major hurricane. That compares with a 30 percent chance historically.”

Therefore, based on four separate professional meteorological opinions, the consensus is that 2008 season will be more active than typical. If NOAA’s trend of its forecast being about 55% to 60% of the actual, then the U.S. may see about five hurricanes with about two of them being a major one. Applying a 45% chance of the gulf region being hit by a major hurricane, that gives us a good chance that roughly about one or two major hurricanes may affect the gulf region substantially enough to disrupt or slow down the oil production and processing.

Given that any slight negative news is able to send the oil prices skyrocketing, I do expect to see the oil and fuel prices not easing anytime soon. If we have a hurricane similar to Katrina, then expect to see gas lines in the U.S. once again (picture: 1979 gas line; source: wikipedia.org).


Regards,
Ed Kim
Practical Risk Manager

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China’s Temporary Housing: A Thousand Times Better Than FEMA Trailers

Mere ten days after the terrible earthquake in Sichuan Province, China is well on its way of building 1 million temporary housing. One million temporary homes in three months!

According to China Daily, China plans on building 1-million temporary housing built from modular material by August 10. In their May 22 photo, below, one can see the quality of the housing that China is building, which puts FEMA and the U.S. efforts after Hurricane Katrina to shame.

“China's Ministry of Housing and Urban-Rural Development said Thursday that it had requested local authorities in earthquake-hit areas to build 1 million temporary homes by August 10 to accommodate quake victims of the May 12 earthquake. A circular issued by the ministry said the transitional homes should be either assembled with steel sandwich panels or made of light-weight steel and plywood kit sets. The size of the houses should be about 20 square meters and provide minimum living space for quake victims, it said. They should be capable of withstanding earthquakes and be recyclable after three to five years of use, said the circular.

It also stipulated that local authorities should construct one primary school, one clinic and one retail store for every 1,000 temporary homes. For every 2,000 houses, a middle school should be built, it added.” – China Daily

The picture, below, shows approximately 240 attached modular homes, each containing 20 square meters (approximately 212 SF). When compared to the FEMA trailers, these temporary modular homes look much more like a home.
China has a robust prefab housing industry[i] so the goal of 1-million homes by August 10 is achievable. Moreover, the central government will ensure that there will be none of the blatant corruption and incompetence shown by FEMA with the aftermath of Hurricane Katrina.

According to a NBC Investigative Unit report, FEMA paid approximately $229,000 per trailer and support infrastructure. The Government Accountability Office (GAO) investigators found “the trailers themselves cost only $14,000, but FEMA wasted big money by placing them at a small temporary site built from scratch with huge maintenance costs.” Additionally, “the GAO found that over a seven month period, FEMA made a total of $30 million in improper or fraudulent payments for trailer maintenance alone. The investigators also found examples of phony inspections, rigged bids, and excessive payments.”

We pride ourselves as being the world’s super-power. However, when it comes to providing even the most basic infrastructure support and aid to our own citizens, the U.S. has clearly demonstrated that it is no better than some third-world banana republic.

This will be clearly evident at the Beijing Olympics as the Chinese Government showcases the relief efforts’ successes, including building 1-million temporary homes, schools, hospitals, and other support structures made from recyclable materials. Once that happens, there will be a lot of compare and contrast made in the media between the Chinese’s success and U.S.’ dismal failure, which is still continuing in the Gulf region.

Regards,
Ed Kim
Practical Risk Manager
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[i] Some of the companies that manufacture prefab housing in China are:
Beijing Baofengyuan Steel Structure Engineering Co., Ltd.
Shangyu Silverwood Lightsteel Technology Co., Ltd.
Nantong Huasha Movable House Co., Ltd.
Beijing Chengdong Prefabricated House Co., Ltd.
Conceiving Board-Manufacturing Co., Ltd.

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