Showing posts with label Crisis. Show all posts
Showing posts with label Crisis. Show all posts

Mar 11, 2011


IMF evaluated its role and performance in the recent financial and economic crisis.

In a 2011 crisis report with the short title: 'IMF Performance in the Run-Up to the Financial and Economic Crisis:IMF Surveillance in 2004–07 ', IMF concludes that the main cause of their inadequate response during the crisis was:


IMF’s ability to detect important vulnerabilities and risks and alert the membership, was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed.

The IMF’s ability to correctly identify the escalating risks was hindered by:
  1. A high degree of groupthink 
  2. Intellectual capture
  3. A general mindset that a major financial crisis was unlikely
  4. Inadequate analytical approaches
  5. Weak internal governance
  6. Lack of incentives to work across units and raise contrarian views
  7. A review process that did not “connect the dots” or ensure follow-up
  8. Some impact of 'political constraints'....

IMF suggests some recommendations on how to strengthen its ability to discern risks and vulnerabilities and to warn in the future. Main point is to enhance the effectiveness of surveillance: it is critical to clarify the roles and responsibilities of the Board, Management, and senior staff, and to establish a clear accountability framework.

Looking forward, IMF needs to
  1. Create an environment that encourages candor and considers dissenting views
  2. Modify incentives to “speak truth to power”
  3. Better integrate macroeconomic and financial sector issues

  4. Overcome the silo mentality and insular culture; Deliver a clear, consistent message on the global outlook and risks.

Recognize Groupthink
Groupthink is not just something happening to IMF or 'other organisations'. We, financial institutions, all suffer somehow or somewhat from the Groupthink Virus.

How can we recognize Groupthink?
Derived from an article by Irving Janis, the inventor of the word Groupthink, let's take a look at some explicit signs of Groupthink:

  1. Winning Mood syndrome
    A common illusion of success (Folie à deux), invulnerability, over-optimism, unanimity and risk-taking as a consequence.
  2. Collective rationalization
    Managers, employees discount warnings and do not reconsider their assumptions
  3. Repression or Ridicule
    Direct pressure on and ridicule of  individuals who express disagreement with or doubt about the majority view or the view of the leader
  4. Fear
    Fear of disapproval for deviating from the group consensus. Fear from or doubt about expressing your opinion.
  5. Manipulating
    Remaining silent in a discussion is implicitly interpreted as agreeing.Obviously 'wrong' arguments are used to achieve a certain goal or policy.
  6. Disrespect
    Stereotyped views of out-groups or enemy leaders as evil, weak or stupid. Good or serious ideas of colleagues are rejected on basis of the source instead of 'judged by the facts'.
  7. Moral Blindness
    Unquestioned belief in the inherent morality of the in-group. Lack of discussion about ethical or moral aspects of certain decision.
  8. Miscommunication and Misinformation
    Information, bottom up or top-down is (deliberately) strongly filtered
  9. Idolization
    Idolization of the leader or of certain five star employees.

Lessons Learned
If you recognize some of the above signs in your organization, it is time for action.
Discuss it, do not accept it and if you cannot change it... LEAVE!

A humorous example of Misinformation are the quotes of Iraq's minister of (Mis)Informaton, Al-Sahaf, during the 2003 Iraq war.
Enjoy, laugh and learn.....

Make sure your board presentation is not based on' sahaf-statements' but on simple provable actuarial facts....

Related links/sources:
- 8 signs of groupthink
- What is Groupthink?
- IMF Crisis Report 2011

Mar 13, 2010

Magic Banking

Based on an idea as presented in a joshing blog by Henry Blodge, CEO of The Business Insider, here's the slightly changed formula for making thousands of investors happy, becoming a millionaire within months while having a successful career as well.

Become a banker!
All it takes, is to start a new bank. Don't worry, it's simple as will be shown.

This is how it works:
  1. Form a cooperative bank called: Cooperative Magic Bank (CMB).
    A cooperative bank is a financial entity which belongs to its members, who are at the same time the owners (shareholders) and the customers of their bank.
  2. Appoint yourself CFO together with two of your best friends as Board members. Set your yearly Board Bonus at a modest 10% of CMB's profits.
  3. Make a business plan (this blog IS the business plan)
  4. Raise $ 100 million of equity and $ 900 million of deposits, as follows
    • Offer your prospects/clients a guaranteed 4.57% guaranteed return on investment.
    • Offer a 70% yearly profit share. First year return on investment guaranteed 13,35% !
    • Everybody who wants to join the bank becomes a 'Lucky-Customer-Owner' (LCO)
    • Every LCO is obliged to invest 10% of his investment as shareholder capital.
    • The other 90% is invested in the CMB-Investment Fund (CMBIF).
    • CBMIF guarantees the return (and value) on the LCO's account based on a 30 year Treasury Bond
  5. Borrow $3 billion from the Fed at an annual cost (Federal Discount Rate) of x=0.75%.
  6. Buy $4 billion of 30-year Treasury Bonds paying y=4.57%
  7. Ready! Sit back and enjoy high client satisfaction and your Risk Free career and bonuses as a professional banker!

Magic Banking
Wrapped up in a 'Opening Balance Sheet and a first year ''Income Statement', this is how it looks like:

This is how the FED helps you to become a millionaire. but the party is not yet over.....

Pension Funds and Insurance Companies
If your the owner of a pension fund or an insurance company, starting a 'Magic Bank' could help you achieve a total 'risk free' return of 4,57% with an upward potential of 13,35% as well.

So why should you set up a complex investment model that you don't really see through, to achieve a risky 6% or 8% of return on investment, if you can have more than a 'high school comprehensible' 10% return without any substantial downside risk by starting a Magic Bank instead?

Together with the new Basel and Solvency regulation, this 'magic bank principle' will cause banks to sell their investments in more risky assets like insurance companies. On the other hand, insurance companies and pension funds will probably be interested in starting new banks to profit from the FED's 'free credit lunch'.

Criticasters and Risk
Some criticasters will rightfully point out that the magic bank is not completely risk free. Indeed there are some risks (e.g. the treasury bond volatility), but they can be adequately (low cost) managed by means of stripping or derivatives (e.g. swaptions).

Of course there's also the risk that the Fed will raise the short rates (Federal Discount Rate).In this case, instead of using derivatives upfront, one might simply swap or (temporarily) pay off the FED loan. Yes, your return will temporarily shrink to a somewhat lower level. But who cares?

Moreover, keep in mind that as long as we're in this crisis, the Fed's short money will be cheap. Don't ask why, just profit! By the time the crisis is over and Federal discount rates are more in line again with treasury notes, simply change your strategy again.

And if - regrettably - the federal discount rate and the treasury bond rate rise at the same time, simply book a life time trip to a save sunny island to enjoy your 'early pension' of $ 11.1 million (ore more).

For those of you who still doubt and for all of you who like a humorous crash course in investment banking, just click on the next video by Bird & Fortune....

Let's get serious
Although for us actuaries it's clear that because of the Asset Liability Mismatch, the magical bank is a running gag, the principles and consequences of the situation as described above are bad for the economy.

Financial Health Management
Banks and financial institutions in general are discouraged to act in their primary role as risk transfer institutes by performing on bases of professional calculated risk.

Why would they take any additional (credit) risk if they can generate their revenues almost 'risk free' with help of the Fed?

We all know that without risk, there's no economic added value either. Continuing this Fed policy will lead to Bob hopes:

A bank is a place that will lend you money, if you can prove that you don't need it.

Maintaining the current Fed policy keeps the banks alive, but ill.

What's needed is a new Federal Financial Health policy.

Over the last decades the relative equity (equity in % of assets) of Banks deteriorated from a 20% level to a 3-5% level in this last decade.

Banks need to be stimulated to take appropriate healthy risks again, while maintaining a sound individual calculated 'equity to assets ratio', increased with an all over (additional) 5% risk margin.

The Fed should therefore act decisively and:
  • stop the ridicule and seducing leverage risk levels
    Redefine the Capital Adequacy Ratio (CAR). The new Basel III leverage, calculated as 'total adjusted assets divided by Tier 1 capital', won't do. Strip the nuances, limit 'adjusting', add a surplus.
  • Limit and make all new financial products subject to (Fed) approval
  • Limit the proportion of participating in products that only spread risk (e.g. Citi's CLX) instead of neutralizing or matching risk
  • Raise the discount rate as fast as possible,

to prevent moral hazard and economical laziness that eventually undoubtedly ends in a global economic melt down.

However, there's one small problem..... The FED has to keep the discount rate low because otherwise financial institutions that run into trouble aren't able to finance their loss in a cheap way and will activate the nuclear systemic risk bomb (chain reaction).

It seems we're totally stuck in a governmental financial policy paradox. Nevertheless the FED should act now!

- Henry Blodge Video on Modern marketing...
- 30 year treasury bonds
- Historical Federal discount rates
- Can Basel III Work?
- The Economist: Base Camp Basel (2010)
- Citi's Financial Crisis Derivatives Should Be Banished From Earth
- Capital Adequacy Ratio (CAR)
- Treasury yields

Nov 27, 2009

Invest or laugh

Every crisis generates his own new quotes. Currently, investment quotes are the top.

Perhaps two of the best investment quotes ever are from AIG Vice Chairman Jacob Frenkel:

"The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine."


"Credit markets do not function. Why not, because the word credit comes from credibility"

But there's more... A nice summary of investment ROFL quotes can be find on Ian Thomson's blog Investor Jokes.

As actuaries, let's profit from Ian's latest insights and gain some extra education points by studying the next new investment definitions:

  • A long term investment: Short term investment that failed.
  • Momentum Investing: The fine art of buying high and selling low.
  • Value Investing: The art of buying low and selling lower

Probably investors and actuaries will have a hard time understanding each other, as the difference between them is in the 'tail' .....

Also large-cap fund managers have a hard time these days. No wonder everybody starts looking for a small-cap fund manager....
But how do you find one? Ians' answer is simple: Find a good large-cap fund manager, and wait...

Anyhow, keep up your good mood and laughs, as more investment 'animals' will show up next months.....

Let's conclude this blog with an old actuarial warning:

"Where there's smoke, someone gets fired"

P.S. For some more 'serious' investment quotes take a look at 52 Must Read quotes from the legendary Investor Warren Buffett. I'll quote some of the best here:
  • I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
  • If past history was all there was to the game, the richest people would be librarians (actuaries?).
  • It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
  • It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.
  • It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
  • Price is what you pay. Value is what you get.
  • Risk comes from not knowing what you’re doing.
  • Risk is a part of God’s game, alike for men and nations.

How can actuaries profit from Buffett's quotes?

- Greekshares Jokes
- Ian's Investor Jokes
- Warren Buffett: 52 Must Read quotes

Oct 13, 2009

Humor: Actuary Solves Credit Crisis

One upon a time there was a small village depending on only one source of income, tourism... the only problem was - due to the 'crisis' - there were no tourists left...

Every villager had to borrow from an other in order to survive.. several months passed .. everyone felt miserable.

One day a cost conscious actuary, visiting a Risk Conference nearby, arrived in the village.

Heading for a cheap overnight stay, he booked a small room in the only available local hotel. He paid in advance with a 100 dollar note and went to his room to prepare for the conference.

Before the actuary could unpack his bags, the hotel owner had already taken the 100 dollar note, heading his way to pay the butcher.. to whom he owed precisely 100 dollar.

The butcher, in his turn, immediately ran off with the 100 dollar to see the local farmer and paid his debt for all the meat he'd been supplied with...

With the same 100 dollar note, the farmer immediately paid the seed salesman who, right at that time, was visiting the farmer to collect the unpaid 100 dollar bill.

Back in his hotel, the seed salesman closed the circle. In order to settle the hotel bill for that night, he dropped the 100 dollar note on the counter. Just at that moment, the actuary - who'd come down to tell the hotel owner that he didn't like his room - arrives at the counter, picks up his 100 dollar and disappears.

Nothing was spent,
nothing was gained,
nothing was lost.
Nonetheless, thanks to the actuary, nobody in the village had any debts!

This story shows why it's important for actuaries to attend Risk Conferences and illustrates how actuaries can actively contribute to solving the credit crisis.

Original Sources: Free after newciv, Dutch source Aardbron

May 6, 2009

Chinese Actuary - Computer - Crisis

One of the interesting aspects of the Chinese language is that words are like little pictures, pictograms or logographs, the so called 'characters'. Moreover, some words are a combination, or (better) a superposition, of several of those characters.

So the meaning of a Chinese word can be deducted by interpretation of the pictograms and relating them. And, as the saying is "A picture is worth a thousand words", you don't need to be an actuary to calculate the enormous expression-power of the Chinese language. Every word is like a book of words and expresses not only the rational meaning but also the embodied feeling (mood) that goes along with the the formal meaning.

The power of the Chinese language can be illustrated by three simple examples, the Chinese words for Actuary, Computer and Crisis:

1. Actuary
The Chinese word for Actuary is :精算师

Pronunciation: jing suan shyr

The Chinese word Actuary consists of three characters:
  1. Jing, 精, means Skilled or Elite
  2. Suàn, 算, means 'to calculate' or 'to count'
  3. Shyr, 师, a suffix meaning 'a profession of' or a skilled or 'qualified practitioner of certain professions'

So, as a consequence, a stripped and therefore 'shortcoming' translation of the Chinese word for actuary would be: 'a skilled and qualified calculator'

Sources: Masteringmandarin, Translation, Wei Liu Dictionary,
Actuary Translated: A statistician who computes insurance risks and premiums.

2. Computer
The pictogram on the right means "computer" in Chinese. Actually, it consists of two characters that literally mean "Electric Brain", which the Chinese read as "computer".

However, as you may notice, the two main characters each exist of several sub-characters that also contribute and add meaning to the word 'Computer'.

Source, and more info at: Ebrain

3. Crisis
With the current credit crisis ( 信贷危机 xìndài wēijī) in mind, let's look at the Chinese word for 'crisis'. It consists of two characters

So in Chinese crisis means something like

Crisis = Danger + Opportunity

Let's apply this to daily business life.

No matter how great the danger in a crisis is, it also means a change of circumstances that creates space for new opportunities. It's an art to spot those opportunities when you're in the middle of a crisis.

But what if you're caught in a storm crisis:

Golden Rules Crisis Risk Management
In terms of risk management: If you're caught in the storm (trouble) and can't get out, don't try to. Try to get to the eye of the storm, where it's calm.

So when you're in the middle of a (credit) crisis :
  • Don't run
  • Set time still (Let time do the work)
  • Keep your head together
  • Wait for the opportunity, no matter how hard it is or how long it takes

Some more tips on how to behave in crisis situations you'll find on