Tag Archives: risk

It’s Oxymoron– Managing Risk and Uncertainty: An Organization Without Risk is Organization Stuck in a Rut…

Risk is a basic ingredient for innovation… Risk implies uncertainty and an inability to fully control the outcomes or consequences of an event… It’s an uncertain world and organizations must accept the fact that they operate in a world of unknowable risk… According to Donald J. Riggin; regardless of the nature of risk it’s impossible to manage; in fact, the expression ‘risk management’ is an oxymoron, because if risk was manageable it would no longer be considered risk…

However, understanding risks is a critical step to knowing how to deal it… According to Steve Tobak; the notion that– Big Risk beget Big Reward is nonsense… Whether it’s the world’s top– hedge fund traders, venture capitalists, real estate tycoons… these billionaire insiders look for opportunities that provide asymmetrical risk/reward… This is fancy way of saying that ‘reward’ is drastically disproportionate to ‘risk’…

In the article Decision-Making Under Risk and Uncertainty by Samia Rekhi writes: The starting point in decision-making is the distinction among three different states of a decision environments: certainty, risk, uncertainty. The distinction is drawn on the basis of the degree of knowledge or information possessed by the decision-maker… Certainty can be characterized as a state in which the decision-maker possesses complete and perfect knowledge regarding the impact of all of the available alternatives…

Often when making decisions the two terms ‘risk’ and ‘uncertainty’ are used synonymous… Both imply ‘lack of certainty’, but there is a difference between the two concepts; risk is characterized as a state in which decision-makers have imperfect knowledge– incomplete information but enough to assign a probability estimate to possible outcomes of a decision…

These estimates may be subjective judgments or they may be derived mathematically from a probability distribution… Uncertainty is a state in which the decision-maker does not have enough information to make a subjective probability assessments… It was Frank Knight who first drew a distinction between risk and uncertainty; risk is objective, whereas uncertainty is subjective… risk can be quantified, whereas uncertainty cannot… Uncertainty implies that probabilities of various outcomes are unknown and cannot be estimated… It’s largely because of these two characteristics that decision-making, in risk environment, involves primarily subjective judgment…

All business decision-making have common characteristics. The traditional approach requires precise information and thus often leads management to underestimate uncertainty and risk factors, which can be downright dangerous for an organization… According to Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguer; making sound decisions under uncertainty requires an approach that avoids the dangerous binary view of risk…

Available relevant business decision information tends to fall into two categories… First, it’s often possible to identify clear trends, such as; market demographics… Second, it’s also possible to identify not so clear trends, such as; customer psychographics…The uncertainty or risk factors that remains tend to fall into one of four broad levels …

  • Level one: Clear enough future: The uncertainty is irrelevant and risk factors are relatively low for making decisions… hence, management can make reasonable precise decisions… Also management can use traditional information gathering, such as; market research, analyses of competitor costs and capacity, value chain analysis, Michael Porter’s five-forces framework, and so on…
  • Level two: Alternative futures: The future can be described as one of a few discrete scenarios… Although probability analysis is useful it cannot precisely identify which outcome is most likely to occur…
  • Level three: Range of futures: A range of potential futures can be identified… A limited number of key variables define the range and most likely outcome can lie anywhere within the range. There are no natural discrete scenarios for the outcome. Organizations in emerging industries or entering new geographic markets often face this uncertainty…
  • Level four: True ambiguity: A number uncertainties and risk factors create an environment that is virtually impossible to predict. And it’s impossible to identify a range of potential outcomes, let alone scenarios within a range. It might not even be possible to identify, much less predict, all the relevant variables that define the future. This situation is rare– black swan events– although they do exist.

Knowing how to assess risk is an organizational competency that must be fostered for long-term sustainability… To do so requires new language and tools to facilitate effective decision-making and decisive action. According to Ralph Jacobson; in developing business strategy it’s important to determine an organization’s ‘risk appetite’, i.e.; how much risk it’s willing, and can afford, to accept… This involves identifying and understanding the scope of risk required in a decision. Typically there are four options– avoid it, accept it, transfer it, share it…

But often decision-makers are confronted with unknowns– these are ‘unknown unknowns’… These unknowns are things that haven’t even been thought of as possible– black swan occurrence– rare but they do pop-up every now and then… situations where management tries to understand more about what they don’t know, than what you do know... These are precisely situations where innovation thrives– it’s when innovators push the edges, challenge status quo, break boundaries in the realm of uncertainty and risk taking. According to Dan Gregory and Kieran Flanagan; uncertainty suggests taking risks, going beyond the known and knowable– thinking scared, thinking stupid, thinking different…

Thinking scared is simply understanding that fear drives all decision-making– it might be the fear of taking action or fear of not taking action. These twin forces often govern negative behavior… but they can also be marshaled and used for positive motivation– the fear of missing out is perhaps most potent motivation in many organization. It’s human nature to resist change and this same nature can be used to drive innovation that embraces risk and uncertainty, and thinks beyond scared, thinks beyond stupid, thinks beyond different…

Challenge of Managing Business Risk– Basis for Sustainability: Know and Understand Uncertainty and the Risk Landscape…

Risk is defined as the probability of an unforeseen incident, and its penalty on the business… Whatever the purpose of an organization, the delivery of its objectives is surrounded by uncertainty which both poses threats to success and offers opportunity for increasing success…

You can safeguard your business and increase its success rate by having an effective risk management policy in place. By identifying the risks before they occur, you will have the time and space to prepare and to put solutions in place if needed… Risk management may seem scary when you are planning your business. But by having business risk plan in place, you can ensure that you protect the viability of your business…

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Risk is defined as the uncertainty of outcome, and it must be assessed with respect to a combination of the likelihood of something happening, and the impact if it does actually happen. Risk management includes; identifying and assessing risks (‘inherent risks’) and then responding to them… The resources available for managing risk are finite and so the aim is to achieve an optimum response to risk, prioritized in accordance with an evaluation of the risks.

Risk is unavoidable, and every organization needs to take action to manage risk in a way which it can justify to a level which is tolerable. The amount of risk which is judged to be tolerable and justifiable is the ‘risk appetite’.  Response to a risk situation may involve one or more of the following actions:

  • TOLERATE: The business’ exposure may be tolerable without any further action. Even if it’s not tolerable, the ability to do anything about some risks may be limited, or the cost of taking any action may be disproportionate to the potential benefit gained…
  • TREAT: The greater number of business risks will be addressed in this way. An action is taken to constrain the risk to an acceptable level…
  • TRANSFER: For some business risks the best response may be to transfer them to either reduce the exposure of the organization or because another organization is more capable of more effectively managing the risk, however, some risks are not (fully) transferable…
  • TERMINATE: Some risks will only be treatable, or containable to acceptable levels, by terminating the activity, and this might become more clear when the cost/benefit relationship is in jeopardy…

Effective risk management requires understanding more about what you don’t know than what you do know. In particular, it must recognize when new risks are emerging. Too often, risk assessment plot the usual ‘known knows’, leaving executives and directors under-whelmed because the process doesn’t really tell them anything they don’t already know…

World Economic Forum’s Global Risks 2013 Report is an annual survey of more than 1,000 experts from industry, government, academia and civil society who are asked to review a landscape of 50 global risks. .. The global risk respondents rated most likely to manifest over the next 10 years is ‘severe income disparity’, while the risk rated as having the highest impact if it were to manifest is ‘major systemic financial failure’.

There are also two risks appearing in the top five of both impact and likelihood; ‘chronic fiscal imbalances’ and ‘water supply crisis’…Unforeseen consequences of life science technologies’ was the biggest mover among global risks when assessing likelihood, while ‘unforeseen negative consequences of regulation’ moved the most on the impact scale when comparing the result with last year’s…

Resilience is the theme that runs through this report. It seems like an obvious one when contemplating the external nature of global business risks because they are beyond any organization’s or nation’s capacity to manage or mitigate on its own. And yet these global risks are often diminished, or even ignored, in current enterprise risk management. One reason for this is that global risks do not fit neatly into existing conceptual frameworks, and fortunately this is changing…

The report advises that building resilience against external risks is of paramount importance and alerts directors to the importance of scanning a wider risk horizon than that normally scoped in risk frameworks… When considering external risks, directors need to be cognizant of the growing awareness and understanding of the importance of emerging risks…

The 2014 annual Emerging Risks Survey (poll of more than 200 risk managers predominantly based at North American re/insurance companies) reported the top five emerging risks as follows: Financial volatility (24% of respondents). Cyber security/interconnectedness of infrastructure (14%). Liability regimes/regulatory framework (10%). Blowup in asset prices (8%). Chinese economic hard landing (6%)… It’s interesting to observe the diversity in understanding of emerging business risk definitions. For example; Lloyds: An issue perceived to be potentially significant but may not be fully understood or allowed with respect to– insurance terms and conditions, pricing, reserving or capital setting… PWC: Large-scale event, circumstances beyond direct capacity to control that impact in ways difficult to imagine today… S&P: Risks that do not currently exist…

In the article Managing Risk: Where Are You on the Curve? by Ralph Jacobson writes: The management of business risk is now forefront for senior leader’s key agenda items. Knowing how to assess risks and properly manage them is a critical organization competency that must be fostered for long-term business sustainability. To do so requires new language and tools to facilitate effective strategic thinking, decision-making, and decisive action…

Here are some thoughts to help senior leaders transition to a world characterized by significant risk, for example; the S-curve is effective for evaluating risk and determining the various kinds of action that should be taken at specific points in time. The curve suggests that growth and change happen along an almost predictable trajectory of three distinct phases… Knowing where issues falls on the curve determines most effective action.

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One of the powerful attributes of the model is that it can provide a timely way to determine when a new discontinuous change occurs and its relationship to the current state. The S-curve can be used to determine the types of organization and leadership issues that will be encountered on the journey… It’s a Collision of two worlds: The generic S-curve suggests that when a few pioneers start a new S-curve (green line) they are initially ignored by those who remain intent on achieving the historical performance metrics and objectives… The existing stakeholders (pink line) view the green line as an unnecessary drain on resources at a time when financial and people assets will be at lower levels because the organization is experiencing ‘stage-3’ decline..

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Caught between these forces are those who resist change and those who under-appreciate the accomplishments of the past… senior leaders must help each side understand the need to do both; maintain the past approaches long enough to reap short-term benefits and focus on establishing the successful implementation of the new-to-achieve long-term benefits… The concept of the S-curve helps leaders frame the situation so that players depersonalize their negative energies, and help each side find value in the other. It’s in this manner that the senior leader can help balance such risks the ‘long and short-term’; current financial model and the new model…

Historically companies have viewed business risk through a functional lens (financial risk, human capital risk, supply chain risk, etc.), and by focusing on one distinct ‘silo’ you can miss the interrelatedness of risk to a company. that is, miss those connections and you may misfire when attempting to manage it… According to Robert S. Kaplan and Anette Mikes; Organizational biases inhibit the ability to discuss risk and failure. In particular, teams facing uncertain conditions often engage in ‘group think’: Once a course of action has gathered support within a group, those that are not yet on board tend to suppress their objections, however valid and fall in line… Which means that many business rather than mitigating risk, they actually incubate risk by tolerating minor failures and defects– treating early warning signals as false alarms– rather than alerts to imminent danger…

According to Gerard Joyce; managing business risk makes company’s actions more predictable, thus more successful. The ISO 31000:2009 standard outlines principles and guidelines to follow in implementing a structured process for managing business risk effectively Managing business risk in a systematic way can be an enabler,e.g.; decision-making is more informed, presumptions and assumptions are challenged, and actions taken are more likely to achieve desired outcomes. A structured process highlights the ‘Key Risk Indicators (KRIs)’ or early warning signs that need to be monitored. These enables the organization to take pre-emptive action to avert or mitigate significant outcomes…

According to Jeanne Lauf Walpole; business risk management is identification, assessment and economic control of those risks that can endanger assets and earning capacity of business… Once a complete list of risks has been established, then each risk should be assessed for its probability of occurrence, for example: Very likely to occur; Some chance to occur; Small chance to occur; Very little chance to occur… Also, it’s important to evaluate potential financial damage that can result from each risk, and respond appropriately. Business risk management decisions must be based upon preventing, as much risk as possible although complete eradication may not be realistic, and/or mitigating risks at a level that’s at least tolerable for the business…

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According to Peadar Duffy; risk and strategy are intertwined, and one cannot exist without the other, and they must be considered together. Such consideration needs to take place throughout the execution of strategy. Consequently, it’s vital that consideration is given to ‘risk appetite’ when business strategy is formulated– and that requires a well-conceived business strategy and superior execution, on the one hand… and very serious risks assessment and process, on the other…

According to Adi Alon, Wouter Koetzier, Steve Culp; most companies opt to reduce uncertainty by leveraging the traditional– stage-gate innovation process. Stage gates are designed to identify the best ideas by putting them through multiple reviews or gates… This concept, in principle, is extremely effective but in reality new opportunities tend to be defined very narrowly.

As a result, promising news ideas that are a little off center are often smothered. And while many of innovation initiatives that do gain approval are low risk, they offer only low returns– incremental improvements that usually do little more than maintain market share. Whereas, prudent risk-taking when managed properly is the foundation for business growth and sustainability…

Steganography– Hiding in Plain Sight: Business Data Security through Obscurity– Art of Covert Communication, Hide-See…k

Steganography is based on a kind of camouflage: where the familiar and superficial draws attention away from the occluded and hidden. Do they see the leopard’s spots, or the leopard? ~Stowe Boyd

Steganography is the art and science of hiding information by embedding messages within other seemingly harmless messages. It works by replacing bits of useless or unused data in regular computer files (e.g., images, graphics, sound, text…) with bits of different, invisible information… Since rise of the Internet one of the most important factors of information technology and communication is security of information.

Cryptography was created as a technique for securing the secrecy of communication and many different methods have been developed to encrypt-decrypt data in order to keep messages secret. Unfortunately sometimes it may not be enough to keep the contents of a message secret, it may also be necessary to keep the existence of the message secret.

The technique used to implement this, is called steganography, and it differs from cryptography in the sense that where cryptography focuses on keeping the contents of a message secret, steganography focuses on keeping the existence of a message secret.  For example; a firm suspected that an insider was transmitting valuable intellectual property out of its network, and after checking mail logs, investigators found the smoking gun; two e-mails with harmless-looking image attachments… It turned out, that the images were hiding important company intellectual property (IP) by using steganography…

Currently, steganography represents a classical paradox: It’s next to impossible to convince people to look for something they cannot see and do not think anyone is using, because there is no large body of empirical data to prove that steganography is being used to transmit information outside of corporate networks…

In the article Steganography by Bojana writes: The rise of the Internet brought many advantages to our society but modern users also face various risks. Our virtual lives are under a constant threat from someone breaking into our computers or account, so it’s essential that all our sensitive data is properly secured…

Encryption is a great way of preventing third parties from accessing data illegally, but the most effective protection would be to hide the fact– that such data even exist. In its original form, steganography refers to making hidden messages in such a way that only a sender and a recipient have access to them. When it comes to digital data, steganography is a common method of data protection and includes; concealing data within encrypted or random files.

Steganography allows you to conceal important data within other files on your devices in such a way that they don’t attract attention to themselves. Basically you can code a message within an MP3 song or a photo and no one ever needs to know that there is something more important beneath the surface. Stenography occupies certain bits of audio or image files, so they can be opened regularly without anything to point out that they contain a secret message…

In the article Steganography for Dummies by Scott Berinato writes: Steganography works not by beating security, but by avoiding it all together. In a risk-based security program, a picture appears to pose no risk and thus bypasses further scrutiny. In order to get to the secret message you must: 1) know that it’s there, 2) have software to extract it, 3) know the password required to extract it.

But the larger point is you can spend all the money you want on security technology with super-complex algorithms for determining what is suspicious and it won’t flag or inspect a picture, image– it’s a secret message. For example, a person could have been delivering this week’s betting lines for an online gambling ring they mastermind, or a map to the spot where to pick up a drug shipment, or trading hard copies of product development data at an airport…

Or, if they wanted even more security, they could have opened an online picture-posting account (e.g., Flickr) and put 1,000 images there, with certain ones containing documents… All that’s required is that the ‘cipherer and decipherer’ communicate– what to look for? where to look? For example, an e-mail with the subject ‘new pictures’ could be a code for ‘secret messages’…

In the article Protect Your Organization from Steganographic Data Theft by Tom Olzak writes: It appears that steganography is a growing challenge for forensics investigators and organizations using content monitoring or filtering to protect sensitive data. The art and science of steganography has been around for centuries. It’s used to write hidden messages in a way that prevents anyone but the recipient from interpreting them.  

According to Russell Kay; steganography strips less important information, ‘bits’, from digital content and injects hidden data in its place. This ‘bit’ replacement is typically performed across the entire image. Once the text is inserted in the image, the ‘stego-medium’ is locked with a password… According to Gary C. Kessler; details methods to detect and defend against theft by steganography include:

  • Looking for markers like the slight image color difference…
  • Large number of duplicate colors in an image can be indicator…
  • When ‘suspect image’ is larger than ‘base image’, there might be hidden information…

In the article Steganography by Hassam writes: Data security has been a cat-and-mouse game between those for whom data hiding is the ultimate goal and for those who would prefer being capable of deciphering hidden data. The history of this goes back centuries as substitution cipher was practiced in ancient battlefronts. Such schemes are called encryption in which useful information is transformed in such a way that only authorized persons can decrypt information. But the problem is that even this encrypted or scrambled form of information is a tell-tale sign that something fishy is going on.

Encryption poses a risk for the business to be successful, which is why they try to identify and restrict any encrypted data that attempts to travel in or out of a defined security parameter. But here comes the real twist in the story: what about the situation when it becomes very difficult to actually identify the presence of encrypted data?

The study of steganography explains this as the events of hiding valuables in unsuspecting places to ward off robber’s attention… In the digital world as well, where an apparent normal file, say an image, document, sound file… is used as a host to hide information in it. Since these files are exchanged very frequently, over the internet and other communication channels, it becomes very time-consuming to scan each and every file to detect the presence of hidden communication…

Several industrial uses of steganography include; bookmark information to thwart copyright infringement, proof of ownership of digital content, exchanging confidential data over insecure protocols…

In the article Steganographic Cipher: What This Means for Business? by Mott Marvin Kornicki writes: Cryptography protects the contents of a message, and steganography can be said to protect both messages and communicating parties. Steganography includes concealment of information in computer files. In digital steganography, electronic communications may include steganographic coding inside of a transport layer, such as; document file, image file, program or protocol.

Media files are ideal for steganographic transmission because of large size. For example; a sender might start with an innocuous image file and adjust color of every 100th pixel to correspond to a letter in the alphabet, a change so subtle that someone not specifically looking for it is unlikely to notice it… Digital steganography techniques include:

  • Concealing messages within the lowest bits of ‘noisy’ images or sound files…
  • Concealing data within encrypted data or within random data…
  • Concealed messages in tampered executable files…
  • Pictures embedded in video material…
  • Blog-Steganography: Messages are fractionalized and (encrypted) pieces are added as comments…

Steganography provides a means of secret communication which cannot be removed without significantly altering the data in which it is embedded. The embedded data will be confidential unless an attacker can find a way to detect it.

Steganography is still not widely used, and in the rare instances when it is used it is hard to identify. That’s what makes it so appealing… If you need to transmit data from one person to another or simply hide the very existence of data on your hard disk, steganography in combination with encryption is a good attempt.

On the other hand, enterprises need to be aware of this type of attack, as it poses a serious data leakage problem. The problem is that many companies don’t deploy countermeasures to steganography because they’re not aware of the problem.

According to Wood; steganography is more akin to obfuscation than serious security, however, if the data has been encrypted and mixed in with the host data then it is harder – but there are tools that use various techniques to spot content.

In a Frost & Sullivan report says; as steganography continues on its evolutionary path, researchers have unearthed new platforms where steganographic techniques could be employed to hide information seamlessly. Such efforts have rekindled the research and development efforts oriented toward steganography platforms and steganalysis and a number of researchers are working toward discovering new platforms that miscreants could potentially use to hide information. 

Researchers have shown that voice over Internet protocol (VoIP) could emerge into a popular platform for steganography, owing to its ubiquity and the difficulty in detecting hidden information in VoIP streams. In addition to VoIP, platforms such as images and other multimedia content will be widely used for concealing information.

New analysis finds that steganography is gradually gaining attention from the business community and steganalysis tools could slowly find a place in both medium- and large-sized enterprises that are concerned about protecting intellectual assets. Steganography is also gaining traction as a legitimate technology, used for covert communications, copyright marking, data security…

According to Gaurav Sundararaman; apart from the traditional platforms such as; audio, video, images… researchers are looking for additional platforms/digital media through which information can be hidden. An interesting idea under consideration is to have a separate steganographic channel in a network to send messages. Although each platform has many benefits, it’s very difficult to ascertain the single best platform to send hidden messages. Steganography is capable of mitigating piracy by aiding copyright marking…

In future, digital camera manufacturers could implement steganographic features of camera firmware to annotate pictures with the photographer’s copyright information. Going forward, legitimate applications such as tagging of multimedia content with hidden information could become an important application area for steganography.

According to Achyuthanan; there is a distinct lack of awareness about steganography, particularly among the business community… it’s a technology to keep an eye on – both from the perspective of the enterprise needing to protect sensitive information, as well as; the individual who wants to transmit data via one of the safest ways possible…

Business Risks 2013 Global Report: Stay on Top of Uncertain World– Creative Risk-Taking is Essential for Success…

Business risks are the driving-levers of business, and creative risk-taking is essential for success… thoughtless risks are destructive, but perhaps even more wasteful is thoughtless caution which prompts inaction and promotes failure to seize opportunity. ~Gary Ryan Blair

Risks are important part of business and everyday life. Taking wise risks can benefit your business and help you reach and exceed your goals. But, it may be difficult to determine which risks are worth taking, when you’re considering your 2013 projects, investments, plans… For each decision you make, compare the benefits to the potential risk.

Managing risk means thinking through anything that could potentially go wrong in your operation and determining whether or not a control should be used to mitigate that risk. What it all comes down to– is your financial and psychological ability to bear risk.

The rapid increase of complexity is becoming a major concern of 21st-century, i.e., turbulent economy, highly complex processes, organizations difficult to manage… Highly complex business systems are fragile, and can suddenly fail– they are uncontrollable-unpredictable and the enemy of sustainability. Moving from risk management to high complexity management is the new paradigm…

For example, there is– Euro debt crisis, U.S. deficit and debt crisis, slow global growth, unrest in many regions… then add to this the ‘Forum Global Risks 2013’ Report that quite clearly highlights chronic global financial imbalances and possibility of major systemic financial failure– then, these become ‘top 2013 business risks’ facing the global economy. The new reality is a prolonged global economic malaise, particularly in major economies experiencing economic austerity…

International Monetary Fund (IMF) warned that; risks for serious 2013 global slowdown are alarmingly high. It added that this would mean a recession in wealthy nations and serious slowdown in emerging nations. According to Mark Garrett; Europe has entered a 10-year stagnation period, just like Japan did…  Equally, China’s new leadership is clearly worried about the economy. Premier-designate Li Keqiang told China’s National Congress, in November, the period ahead is full of unprecedented risks and challenges.

According to Paul Hodges; as we enter 2013 companies must embark on fundamental change in mind-set and culture. They need to be aware of the risks of major economic disruption and guard against these, as well as they can. But at the same time, they must move beyond short-termist approach of financial markets that created today’s economic uncertainty…

According to Prof Michael Porter; our-field of vision has simply been too narrow and has meant companies have overlooked opportunities to meet fundamental societal needs. Technical and business model innovation is now essential, if companies are to profit from growth markets…

According to Ernst & Young’s 2013 Report; market volatility, pricing pressures, variations in market performance and demanding stakeholders have all contributed to the global economy that encourages competitive drive. And, with drive come opportunity. For that reason, this year’s business risk report looks at both– top business risks and top business opportunities.

As in prior years, we have taken a bottom-up approach, gathering opinions from leading industry-based and academic commentators, across seven global sector groups. In addition, this year, we conducted a second wave of research. This comprised a large-sample survey of companies and governments in 15 countries.

We interviewed a panel of more than 75 sector commentators to identify strategic challenges facing business in seven sectors in 2013. We then surveyed more than 700 leading organizations in 15 countries to discover how companies and governments perceive and are addressing the risks and opportunities that were identified– or in some cases, are struggling to address these challenges:

  • Top Business Risks: Regulation and compliance; Cost cutting; Managing talent; Pricing pressure; Emerging technologies; Market risks; Expanded government role; Slow recovery/double-dip recession; Social acceptance risk/CSR; Access to credit.
  • Top Business Opportunities: Improving execution of strategy across business functions; Investing in process; tools and training to achieve greater productivity; Investing in IT; Innovating in products, services and operations; Emerging market demand growth; Investing in cleantech; Excellence in investor relations; New marketing channels; Mergers and acquisitions; Public-private partnership.

In the article Which Risks Loom Largest for Business in 2013? by ‘The Economist’ writes: Reading reports on risk can have a numbing effect. The more you read the more risks you see; eventually, you succumb to nervous exhaustion. I recently read the publication of two particularly angst-inducing accounts: ‘Global Risks 2013’ by ‘World Economic Forum’  (WEF), and ‘Top Risks 2013’ by ‘Eurasia Group’.

These reports not only provide warnings about dangers that can be avoided through better planning or clearer thinking. They also suggest opportunities-for as they say–it’s a basic law of business that one man’s cliff is another’s ladder. The Eurasia Group’s survey focus exclusively on political risks. Eurasia’s big idea is that the worst risks now come from the emerging world. The rich world has demonstrated that it’s capable of managing risks fairly well– indeed, many rich countries are antifragile (a word that means ‘adept at coping with disruption’ and it’s the title of a book by Nassim Taleb, a scholar of risk).

According to this report; the U.S. could be on the cusp of strong growth, but the emerging world has much less experience of managing volatility or coping with crashes… In our opinion this may be too optimistic about the rich world, e.g., Spain and Italy are hardly antifragile and U.S. is testing the markets’ patience. But it’s true that business folk pay too little attention to political risk in the emerging world (which is likely to account for three-quarters of global economic growth in 2020).

Also, investors often lump very different countries together into a single asset class (e.g., the BRICs). Yet as Eurasia Report makes clear, Russia is much riskier than Brazil: its energy industry is stalling and its middle class is losing patience with kleptocracy. The more the center of economic gravity shifts towards emerging markets, the more business people  must recognize that the emerging world is a horribly complicated place…

According to ‘WEF Global Risks 2013’ Report; global risks are becoming ever more interconnected, and governments must engage the private sector to help them tackle the most serious threats to economies and populations, according to a panel of experts– at the launch of their report on 2013’s biggest global risks. The report survey– 1,234 respondents from business, academia, nongovernmental organizations, international organizations, public sector… and says, that one of the biggest challenges facing companies and countries is the– interconnected nature of risks…

According to Axel P. Lehmann; Risks don’t stop at your factory door… risks don’t stop at national borders; countries must strengthen their risk management approaches… According to John Drzik; governments must invest more in risk management and adopt a multidisciplinary approach to addressing risks…

In the article Five Emerging Risks To Keep An Eye On in 2013 by Andrea Bell writes: Business owners must start thinking about the 2013 risks and be prepared for what the year may have in store. Let’s look at five big emerging risks:

  • Cyber Attacks: Businesses must ensure that they have the most up-to-date security systems, and staff adequately trained in proper data security.
  • Social Media: Social presences can create a number of risks: Misuse can lead to serious reputation damage and data security– accidentally sharing something you shouldn’t, it can be damaging…
  • Climate Change/Extreme Weather: Extreme weather events are more common– business cannot afford to ignore the potential for natural disaster.
  • Economic Stability: U.S. and Europe find themselves in delicate financial positions, at the moment– businesses must consider their financial position and be prepared, if the worst does happen.
  • Something Else: The nature of emerging risks is they come from nowhere. Business must assess and manage risk on an ongoing basis.

In the article IT Risks That Will Crash Your Network in 2013 by Mark Aspillera writes:  A recent study by Gartner predicts that IT spending is going to crest $2 trillion this year. It’s a small increase from 2012′s $1.92 trillion figure, but still a notable one. There are many reasons, but bottom-line is that networks and IT technology are even greater priority for many enterprises going into 2013. IT professionals, in 2013, will have greater power and even more responsibility, especially with economic uncertainty and turbulence, abound, and budgets run lean.

Despite all the ongoing advances in IT tech, however, security and infrastructure dangers are still as much of a problem as they ever were, and look to remain that way for foreseeable future. Here is a handful of prescient threats that IT will be facing in 2013.

  • Bring Your Own Device (BYOD): Key driving factor behind 2013 up-tick in IT spending is the continued proliferation of mobile devices in the enterprise.
  • Social Engineering Slip-Ups: Weakest link in any security plan is the end-user…
  • Bigger, Sneakier Malware: Malware has been around for years, but a particularly nasty strain, the polymorphic malware attack, is set to become more prevalent in 2013.

Economic slow-down still tops the list of the major risks facing business. In light of the current economic global uncertainties, and ongoing Euro and U.S. crisis; there are for the first time several new risks entering the top list, including; business failure to innovate, meeting customer needs, technology-system failure. Moving forward in 2013, businesses must understand their company’s unique range of risks, and it’s essential that they begin to lower their total cost-of-risk…

According to Guy Scott; while it’s difficult to predict which risks will emerge in 2013 and demand attention, we can be certain that successful companies will not be the ones that adopt a ‘wait and see’ approach. Instead they will be the ones that prepare themselves thoroughly to anticipate future needs and undertake the difficult process of finding solutions to address them. They will not just fix what is broken, but view their new circumstances as a portal to the next generation of business opportunity…

According to the ‘Fifth Annual Political Risk Atlas’ by Maplecroft says; situations of societal forced regime change across the Middle East and North Africa, coupled with the prevailing high risk of similar types of regime change in other nations, poses significant risks to business continuity plans. The risk analysis notes– Syria, Libya, Sudan, Yemen, Guinea-Bissau, DR Congo, Zimbabwe, Madagascar, Mali and Bangladesh are potential key flashpoints in the world, and they could impact neighboring countries, as well, spreading risk across the wider regions.

Business risks can emerge in many forms, shapes… suddenly, and companies must be prepared to engage the range of issues that could impact their business…

Debt in Business, Government… Game of Hot Potato: Drop It, Hold It, Sell It, Ignore It..: Pass the Debt or Shuffle the Risk…

Debt is a double-edged sword, capable of doing a lot of good, but also capable of destroying your business (or, the nation). Handle that sword with the utmost care and deliberation, not with a flippant attitude.

Do you remember the game that we used to play when we were kids? We’d sit in a circle and then we would take a potato and pass it from one kid to the next kid in a circle until the music stopped or until somebody said stop. The person holding the potato was out of the game.

According to Joel Block; some business, financial, government… debt issues work a lot like the kids’ game but, unfortunately, it’s more like a ‘hot potato’ game. In this economy, where mortgage debacles are taking down some of the big financial institutions that exist in the country, it’s all related to the concept of a ‘hot potato’. When banks make mortgage loans to consumers, they accumulate the paper that secures the mortgage money that’s been loaned.

They package it up and they sell it to larger organizations that, in turn, accumulate a portfolio for many financial institutions into giant bundles. These bundles, in turn, are sold to other investors. These investors either hold the paper or sell the paper to someone else. The paper keeps moving around and around in circles among giant investor groups. When the music stops, and loans start going bad, some investors are going to get stuck holding the bag full of potatoes.

Although the original game was played with a real potato, today there are many variations of ‘hot potato’, and no single version is the right way to play. The word ‘hot’ is the operative word in any variation, as players do not want to hold on to their ‘potato’ any longer than is possible. Variations can be created to suit most any theme and any situation…

A debt is an obligation owed by one party (debtor) to a second party (creditor); usually this refers to assets granted by creditor to debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. Some companies and organizations use debt as a part of their overall corporate finance strategy.

A company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of characteristics noted above.  Debt allows organizations and people to do things that they would otherwise not be able, or allowed, to do.

Commonly, people in industrialized nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage investment made in their assets, ‘leveraging’ the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier.

For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management). Excess in debt accumulation have been blamed for exacerbating economic problems… and these debt issues in business, financial, government… become the ‘hot potato’…

In the article Managing Business Debt by Lea Strickland writes: The debt clock is ticking up to over $16 trillion. Student loan debt (which has exceeded $1 trillion) now exceeds credit card debt (approximately $800 billion). Politicians are debating its impact and how to address it. But any way you look at things (right or left), debt is a major issue, whether it’s the national debt, student loan debt, or debt needed to finance businesses and homes.

As the country (and world) struggle to deal with debt, individual business needs access to capital, but face limited availability under tighter lending guidelines, markets. Whether you are entrepreneurs or major corporations you have one thing in common: the need to manage debt. For most organizations, debt is a necessary part of the growth equation, often used to smooth out the temporary fluctuations in cash flow. However, debt is not a solution or a fix for bad business practices, inefficient operations, or overly ambitious plans; neither, ‘build it and they will come’ or ‘spend it and figure out how to repay it later’ are sound business practices…

Debt is not about borrowing as much as you can get. Instead, it’s about wisely borrowing an amount sufficient to meet well-reasoned, planned, and temporary condition in the business… Carrying debt is usually necessary at some point in the life of a business. However, carrying debt and making payments on principal and interest means that you begin to have fewer options the larger the debt obligation becomes.

Debt must be temporary, not a crutch or long-term strategy: If you consistently borrow money against credit cards, equity lines, and on vendor terms, juggle payments and scrape by to meet payroll, then you must take hard look at the business and determine what needs to change.

If you are debt dependent, then you need to understand why. If you don’t know why, you must acknowledge that your profitability is being reduced by cost of borrowing funds. One final point: Growth is not always a good thing: Sacrilege, you say! If you are growing sales and operations, but profitability is not increasing and you are not cash positive (i.e., have cash on hand to meet current demands), then you need to take a breath and stop growing until you raise both profitability and cash flow. Growth in sales that does not include comparable growth in profitability and a move to positive cash flow does not generate adequate return on the investment being made…

In the article How much Business Debt is Appropriate? by DB writes: Some conventional wisdom suggests that businesses should only use enough debt to support growth; and in amounts that can be serviced even if revenues decline, significantly. Businesses should be continually forecasting operating revenues to help them decide the maximum amount of debt that can be carried. Once the debt limit is reached, businesses should look to equity or other types of financing to make up required difference.

Most companies that go bankrupt in tough economic times are ones where revenues and related company values declined below the principal values of the business debt. When a company’s market value declines, and the effective loan to values ratios increases to greater than 1, then that means owners no longer have equity in the company. Once owners are ‘upside-down’ in their loans and no longer have any equity in their business, they have no choice but to relinquish control to the lenders.

Most of these situations occurred because the owners took on too much business debt and could no longer service minimum monthly debt payments. To manage debt correctly, owners should understand terms and legal obligations stated in the loan documents. Terms should be analyzed as part of the company’s cash flow forecasting, and in determining appropriate amount of debt required to support business growth without increasing risk of loan default.

Business should refrain from paying debt haphazardly, and instead make payments as set out by a well crafted debt management strategy.

In the article Does ‘Good’ Debt Really Exist? by Marcia Frellick writes: Does ‘good’ debts exist anymore? Financial experts differ, but many say that in today’s economy, it’s time to reconsider how we look at some common types of debt. Traditional thinking separates debt into ‘good’ and ‘bad’. Mortgages and student loans have been considered good debt because they have fairly low-interest rates and hold the promise of a substantial long-term payoff. Auto loans and credit cards usually rate a bad debt label.

Noted personal finance author David Bach says, no. The recession, he says, taught us that ‘all debt is bad, if you can’t pay it off’. ‘For many Americans today, almost 30 to 50% of their paycheck is going just to interest payments, says Bach,  ‘There’s been a real awakening that debt is bad’. Others say ‘good’ debt still exists, that buying a house is still a sound investment over the long-haul, and borrowing for college education is good risk; if borrowing is kept down and the education is for a profession that can pay it off…

Businesses and debt go hand in hand, particularly when they are new and need funds to get off the ground. The ubiquity of debt in business, though, can make it seem deceptively easy to handle when in fact it can be dangerous. Borrowers should have a plan for money they take, and fully understand payment terms and consequences for failure. Hoping to be able to pay it off later is not the same as knowing how it will happen.

Debt should never be a long-term strategy; ideally, it should be a temporary bridge between cash-out and cash-in. The lending industry has become a huge, nationwide game of ‘hot potato’, which worked well enough in good economic times, but as the economy has faltered we’ve started to see some of the huge problems that exist with a lot of these loans, and the so-called sub-prime mortgage crisis is looking more and more like it’s just the tip of the proverbial iceberg.

The global debt situation is getting even more precarious. The world (i.e.,  governments) has kicked the proverbial can down the road each time debt market threatens to revolt. The problem is that now debt problems are compounding. The global debt bubble is continuing to peak its head through the curtain and remind the world that it’s still here, and that it’s still deflating.

According to Chris Whalen; deflation is like the cancer that is progressively getting worse, and it will continue until debt is repudiated or restructured to be in line with the ability to pay… Intentions are good, but sometimes they  lack common sense: For example, there was a political push by U.S. Congress to increase homeownership among all people, but no one seemed to ask; ‘Wait, what if some people cannot afford a home?’

Apparently, no one cared. Because in the insane grab for more and more volume, you can significantly enlarge pool of borrowers, if there are ‘no standards‘. For example: No down payment? We don’t care. No job? We don’t care. Bad credit? We don’t care. It’s amazing how many borrowers you can find when there are no standards and a ‘we don’t care’, attitude.

There was a widespread belief among the entire lending community that everyone was playing ‘hot potato’ game; and, if you get rid of the loan before it goes bad, it was OK. Ultimately, someone gets stuck with the ‘hot potato’, and that’s what happened; but, it continues to happen and more notably with governments…

Dodd-Frank– Monster or Slayer in the World of Financial Business Reform: Its So Complex, No One Knows…

Two years after the sweeping Dodd-Frank Act was signed into law, banks are paring operations and ramping up compliance, regulators are drafting mountains of new rules, and observers still doubt the financial system is any safer than it was after the 2008 financial crisis. ~Dennis Kelleher

The Dodd-Frank ‘Wall Street Reform and Consumer Protection Act’ (Dodd-Frank) is U.S. federal law that places regulation for the financial industry in the hands of government. One main goal of Dodd-Frank is to reduce federal dependence on banks by subjecting them to a myriad of regulations, and breaking-up of any companies that are ‘too big to fail’.

The act created the ‘Financial Stability Oversight Council’ to address persistent issues affecting the financial industry and prevent another recession. By keeping the banking system under a closer watch, the act seeks to eliminate the need for future taxpayer-funded bailouts. According to Robert Kulak; the problem with Dodd-Frank is that it’s so long and ponderous that anyone can say anything about it and be right.

Consider the fact that the Act is 2,319 pages long. Republicans have attacked Dodd-Frank, in part accurately and in part from a partisan perspective. Democrats have defended Dodd-Frank, in part accurately and in part from a partisan perspective. That’s a pretty good debate for an act that neither side understands completely. A particularly contentious issue between banks and the Dodd-Frank is the ‘Volcker Rule’, which prohibit banks from risking depositors’ money on risky investments.

From 1933 to 1999, depositors were protected by ‘Glass-Steagall Act’ (formally, ‘Banking Act’ of 1933). In 2009, ‘Paul Volcker’ described how the ‘Volcker Rule’ should work, in the current economic environment, in a three-page memo. After Dodd-Frank became law, federal banking regulators expanded Volcker’s three-page memo to 298 pages covering 400 topics with 1,300 questions. Then, to provide further clarification, Sullivan & Cromwell, an 800 lawyer law firm, produced a 41 page synopsis (by contrast, the original ‘Glass-Steagall Act’ was 37 pages long, double spaced).

In fact, in their introduction, Sullivan & Cromwell said ‘… the Volcker Rule affects; larger U.S. banking organizations, non-U.S. banking organizations, other financial organizations with trading operations, asset management business or other operations’. Did they say non-U.S.? Did they say other financial organizations? Yes, they did… Also, Dodd-Frank identifies a new acronym– SIFI (systemically important financial institution).

Thus, it appears that Dodd-Frank also sets the stage for not only bailing out banks that are deemed– too big to fail, but also any other SIFI, e.g., insurance companies, real estate companies, Fannie Mae and Freddie Mac, and non-U.S. financial institutions– all would be regulated by Federal Reserve. According to ‘Richard Fisher’ at Dallas Federal Reserve Bank, said; If you are ‘too big to fail’, then ‘you’re too big’. It’s not that we don’t need to better regulate financial industry, we do. But Dodd-Frank, not with standing any positive aspects, is not the way…

In the article Two Years Later, Dodd-Frank Law Largely Stalled  by Bobby Caina Calvan writes: Nearly two years after the signing of the landmark Dodd-Frank legislation, many of the rules meant to restore public trust in the country’s financial institutions have yet to be enacted. Squads of lobbyists, lawyers, and accountants have overwhelmed the rule-making process, in minutia, with blizzards of paper, and hundreds of meetings.

As a result, regulators have missed more than half the rule-making deadlines, with just 120 of the 398 regulations enumerated by law; according to a tally by Wall Street law firm ‘Davis Polk’. Key provisions are still months away, most notably the so-called ‘Volcker Rule’ meant to rein in banks’ appetite for risky investments and prevent repeat of 2008 meltdown that led to the public bailout of some of the country’s largest financial institutions.

To complicate the matte, at least two lawsuits are pending, challenging various aspects of the law’s rule-making process: One filed by Texas community bank and another by several financial industry associations. The Dodd-Frank was a major victory for Democrats, in 2010: an offensive against what they viewed as free-wheeling culture of Wall Street.

Supporters envisioned stronger protections for consumers against predatory lenders, stricter rules for protecting bank deposits from being used for high-risk investments, and transformation of Wall Street into more accountable and responsible public citizen. But, even when finished, we still won’t have resources or people to implement it’, said ‘Gary Gensler’, commission chairman.

He likened the challenges to a football game without enough referees. According to ‘Cornelius Hurley’; to the extent that the purpose of this entire exercise is to restore confidence in the financial system, then that objective is far off… a deeply flawed statute is being implemented haltingly under very difficult circumstances’.

In the article Five Myths about Dodd-Frank by Christopher Dodd (co-author of the bill) writes:  Even though the Dodd-Frank is only beginning to take effect, critics are launching false attacks against the law in an effort to undermine it. Whether they are intentionally misleading or misguided; they are wrong about the law’s purpose and impact. Now, to debunk five of the myths:

  • Dodd-Frank is deepening the economic slowdown: Even though only 10% of Dodd-Frank’s provisions are implemented, so far, critics claim that the law perpetuates ‘job-killing’. In fact, it was the uncertainty inherent in a non-transparent and reckless financial system that made Dodd-Frank necessary in the first place.
  • Dodd-Frank hurts small businesses and community banks: The law is squarely aimed at better regulating the largest and complex Wall Street firms– ones that were most responsible for the crisis and still present the most risk.
  • Dodd-Frank failed to truly reform Wall Street: Dodd-Frank fundamentally transforms the financial system. Requires banks to keep more capital on hand as buffer against bad loans. Establishes process for unwinding firms, if they fail and prohibits Federal Reserve from bailing them out. Brings more transparency and accountability to derivatives market. Shuts down ineffective regulators and insists remaining ones share information to expose next financial trouble spots. Establishes single agency whose mission is to protect consumers.
  • Congress didn’t fix Fannie Mae and Freddie Mac: The issues  with the housing market– as well as, the debate over the future roles of Fannie and Freddie– remain complex and contentious, but they have hardly been ignored.
  • It’s time to repeal Dodd-Frank: In short, repealing Dodd-Frank would invite disaster, putting working families, U.S. businesses and the global economy at risk of an even worse meltdown.

In the article Morning Bell: Dodd-Frank Financial Regulations Strangling Economy by Amy Payne writes: There’s a reason the financial regulation law has been called ‘Dodd-Frankenstein’. This monstrous creation will swell the ranks of regulators by 2,849 new positions, according to ‘Government Accountability Office’ (GAO). It created yet another new bureaucracy called ‘Consumer Financial Protection Bureau’ (CFPB) that has truly unparalleled powers.

This bureau is supposed to regulate; credit and debit cards, mortgages, student loans, savings and checking accounts, and most consumer financial product and service: It’s not even subject to congressional oversight. Frighteningly, the CFPB’s regulatory authority is just as vague as it’s vast. More than half of regulatory provisions in Dodd–Frank state that agencies ‘may’ issue rules or ‘shall’ issue rules as they ‘determine are necessary and appropriate’. Congress avoided making real law with Dodd-Frank, and passed the responsibility for ‘fixing’ the financial sector to these newly minted bureaucrats… which hasn’t been going well.

As Heritage’s ‘Diane Katz’ explains in a two-year checkup of the law: As of July 2012, implementation of Dodd-Frank is behind schedule with 63% of target deadlines missed, which has intensified the cloud of uncertainty surrounding the finance sector and the economy, since passage of the law. Thousands of businesses do not know what the law demands– that they do differently or when they must do it.

The results of this haphazard regulation are dire; Katz says, consumers will have tighter credit, higher fees, and fewer service innovations. Job creation will suffer… financial firms of all sizes are shelling out hundreds of millions of dollars for regulatory compliance officers, accountants, and attorneys rather than making loans for new homes and businesses’. In effect, the law that was supposed to fix the financial sector is hurting consumers rather than ‘protecting’ them…

Scope and structure of Dodd-Frank are fundamentally different than those of its precursor laws, notes ‘Jonathan Macey’, at Yale Law School: Laws classically provide people with rules. Dodd-Frank is not directed at people… It’s a ‘law outline’ directed at bureaucrats, and it instructs them to make still more regulations and to create more bureaucracies.

According to ‘Ron Ashkenas’, HBR blog network; Dodd-Frank passed in the wake of the financial crisis, has the potential to be classic example of ‘controls’ imposed to ‘fix’ a problem, and ‘fix’ becomes so complex that it create other problems. This leads to increasing bureaucratic cycles of more breakdowns, more complex fixes, and more breakdowns. This law’s various sections deals with– bank bailouts, derivatives and swaps markets, mortgage reform, consumer protection, and other issues.

According to ‘Daniel Horowitz’; Dodd-Frank regulations are so complex that most of them have not been formally drafted; causing thousands of businesses to halt expansion and new hiring until the government provides them with some clarity. It’s nothing short of wholesale takeover of financial services and the banking industries; much like Obamacare to healthcare industry.

One of law’s most vocal critics is ‘Jamie Dimon’, who cites not only the cost of compliance, but also difficulty of actually making the regulations work effectively. Another critic ‘Karen Petrou’, says; ‘Dodd-Frank’s implementation is creating ‘complexity risk’ for the financial system. If we don’t understand cross-cutting effects and inherent contradictions in all of the stringent standards now being written into final form, we risk doing real damage.

Responding to criticisms, ‘Treasury Secretary Geithner’ argues; ‘Wall Street is suffering from amnesia about the recent financial crisis… if banks and other financial institutions don’t follow regulations, we’ll have another meltdown’... In fact, we do need effective controls to close gaps that allowed financial systems to fall apart. However, if regulations are unreasonably complex, they will not only create unnecessary costs, but are likely to be unenforceable and eventually ineffective.

What’s clearly needed is something in the middle– simple and practical controls that banks can understand and regulators can enforce. Getting there– requires dialogue, compromise and coordination. Wall Street institutions, government regulators, and other parties need to get together in constructive forums and create realistic and workable practices that fulfill the spirit and intent of Dodd-Frank guidelines. Leaders on both sides should convene key parties, map out, and streamline the regulatory process…

Companies Too Big to Fail or Too Big to Exist: Dilemma– Morton Fork, Hobson Choice, Darwin Rule…

Once you lose your freedom to fail, you also lose your freedom to succeed and you cease to be a free society. ~Jeb Hensarling

Too big to fail (TBTF) is a phrase used in regulatory economics and public policy and describes certain enterprises and institutions that are so large and so interconnected that their failure will be disastrous to the economy. Therefore, the federal government has a responsibility to support them when they face difficulty, so goes the logic.

Proponents of the theory believe that the importance of some institutions means they should become recipients of favorable financial and economic policies from governments or central banks. Some economists, such as, Nobel Laureate Paul Krugman hold that economy of scale in banks and in other businesses are worth preserving, so long as, they are well-regulated in proportion to their economic clout; therefore, the too big to fail status can be acceptable.

In addition, the global economic system must also deal with sovereign states (countries) that are too big to fail. Critics see the policy as flawed and large banks or other institutions should be left to fail, if their risk management is not effective. Critics, such as, Alan Greenspan, believe that such large organizations should be deliberately broken up: If they’re too big to fail, they’re too big.

In the article Too Big to Fail by Kimberly Amadeo writes:  The phrase too big to fail arose during the financial crisis to describe why the government needed to bailout some companies. Big banks, insurers…  improved their profitability by creating, then selling, complicated derivatives…

When economy was booming, they derived an unfair competitive advantage, took over smaller firms, and became even bigger. When their investments started going south, they knew the taxpayers would be forced to bail them out– or risk global economic collapse. An example is AIG, one of the world’s largest insurers. AIG was too big to fail because, if they went bankrupt it could trigger the bankruptcy of many other financial institutions…

Lehman Brothers, investment bank, was also too big to fail but the government refused bailout and it filed for bankruptcy, triggering a deep-drop in the stock market… The mortgage giants, Fannie Mae and Freddie Mac, were also too big to fail because they guaranteed 90% of all home mortgages.

The government guaranteed $100 million in their mortgages, in effect, returning them to government ownership. If Fannie and Freddie had gone bankrupt the housing market decline would have been much worse, since banks were not lending without their guarantees...

Enter the Dodd-Frank Wall Street Reform Act, which is the most comprehensive financial reform since the Glass-Steagall Act. It sought to regulate the financial markets and make another economic crisis less likely. It set-up the ‘Financial Stability Oversight Council’ to prevent any more banks from becoming too big to fail. How? It looks out for risks that affect the entire financial industry. It also oversees non-bank financial firms like hedge funds.

If any of these companies get too big, it can recommend they be regulated by the Federal Reserve, which can ask it to increase its reserve requirement. The Volcker Rule, another part of Dodd-Frank, also helps end too big to fail. It limits the amount of risk large banks can take. It prohibits them from trading in stocks, commodities or derivatives for their own profit, however, they can do so only on behalf of customers, or to offset business risk.

In the article “Big Banks: Now Even Too Bigger to Fail” by David J. Lynch writes:  Two years after the Obama administration vowed to eliminate the danger to the economy from financial institutions that are too big to fail; those same institutions, the nation’s largest banks are bigger than they were before the financial meltdown. Five banks: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs– held more than $8.5 trillion in assets at the end of 2011, equal to 56% of the U.S. economy, according to the Federal Reserve, and that’s up from 43% five years earlier.

These banks, today, are about twice as large as they were a decade ago relative to the economy, meaning trouble at a major bank would leave the government with the same Hobson’s choice it faced earlier: let a big bank collapse and perhaps wreck the entire economy or inflame public ire with a costly bailout. ‘Many believe that nothing has changed, that too big to fail is fully intact, says Gary Stern. Giant institutions sheltered under an invisible government umbrella pose ‘a clear and present danger to the U.S. economy’.

This isn’t what the president had in mind two years ago when he vowed to prevent the further consolidation of the banking industry. The sprawling Dodd-Frank financial regulation bill that he signed in July 2010 was designed to avoid a repeat of the government’s frantic rescue of failing banks. Yet credit-rating companies Standard & Poor’s and Moody’s aren’t convinced that the too big to fail threat has been vanquished.

According to Richard Spillenkothen, former Fed’s director. ‘Probably the only way you can be 100% sure you’ve solved too big to fail,’ he says, ‘is by doing away with banks that are too big.’

In the articleToo Big to Fail – Too Big to Govern – Too Big to Manage.” by John W Rodat writes: The recent news that JP Morgan Chase had incurred a $2 billion trading loss reminds us again of the risks, to the rest of us, of organizations that are not only too big to fail, but too big and complex to be effectively managed.

Professor Simon Johnson, economist, puts it in simple terms:  The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control. The breakdown in governance is profound. Conventional regulation will not protect either the economy or society because regulators have even less information and what information they do have is even more delayed than in the organizations they presume to regulate. 

The only effective solution is to reduce the size and perhaps the complexity of organizations that are so interlinked with the economy and society that the economy and society cannot afford to let them fail. According to Johnson; while information processing capabilities have grown to an extraordinary degree over recent decades, they have still not kept up with the growth in the size and complexity of large financial institutions. When too big to manage meets too big to fail; disaster – or another bailout – is inevitable.

In the article If It’s Too Big to Fail – Is It Too Big to Exist?” by Eric Dash writes: Nearly a century ago, the jurist Louis Brandeis railed against what he called the ‘curse of bigness’. He warned that banks, railroads and steel companies had grown so huge that they were lordingit over the nation’s economic and political life. ‘Size, we are told, is not a crime,’ Brandeis wrote. ‘But size may, at least, become noxious by reason of the means through which it is attained, or the uses to which it is put.’ Brandeis worried that the corporate giants of his day would imperil democracy through concentrated economic power.

His essays, published in 1914 under the title, ‘Other People’s Money and How the Bankers Use It’, helped drum up support for the creation of the Federal Reserve System, antitrust laws, and trust busting.  Devotees of economic Darwinism insist that corporate size, and its accompanying economies of scale, brings progress and benefit to consumers.

But how big is too big to fail? And how would you measure it anyway? In the case of big organizations, policy makers argue that interconnection of modern finance, as much as the size of the players, is the real issue. Frederic S. Mishkin, former Fed director, said; ‘there could be no turning back on too big to fail. You can’t put that genie in the bottle again. We are going to have to deal with it’.

In the article Too Big to Fail or Too Big to Change by Chad Johnson, Bernstein Litowitz Berger & Grossmann LLP write:  Pundits have criticized the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) as capitulating to the interests of big finance; citing the characterizations of SEC settlements as mere slaps on the wrist and the DOJ’s failure to convict a single executive responsible for creating the great recession despite significant evidence of misconduct. 

While the SEC has reached several settlements in connection with misconduct related to the financial meltdown, those settlements have been characterized as cheap, hollow, bloodless, and merely cosmetic, as noted by John C. Coffee, law professor. The relative lack of prosecutions stemming from this financial meltdown stands in sharp contrast to the government’s response to past corporate malfeasance.

The criminal cases arising from the ‘Savings and Loan’ scandals of the 1980s and 1990s, where some of the biggest kingpins– including Charles Keating of ‘Lincoln Savings & Loan’ and roughly 3,800 other bankers– were thrown behind bars, as well as, the Enron and WorldCom accounting debacles in the early 2000s where Jeffrey Skilling, Kenneth Lay and Bernard Ebbers were jailed, demonstrated that executives would be held accountable for their crimes.

As David Einhorn, hedge fund manager, told The New York Times; ‘since there have been almost no big prosecutions, there’s very little evidence that the government has stopped bad actors from behaving badly.’ Simply put, without forcing executives to answer for their misconduct, no amount of financial reform will restore public trust in government or the markets…

Too big to fail (TBTF) has no clear guidelines and thus any large organization can claim; it’s vital to the health of the economy, because its failure would have a domino effect on suppliers. For example, large oil companies going out of business would have a terrible impact on supplies of gasoline and heating fuel…

Big pharma that produce antibiotics and vaccines… which are essential and an interruption in their supply could have catastrophic consequences, from a public health point of view… According to Michael Heberling; TBTF is problematic, because it indirectly influences how companies are managed. If there is a real, or implied, government safety-net, management might be inclined to take on more risk for greater profit… Expecting a government bailout if things go wrong creates an incentive for a company to take on risk and enjoy the associated increase in return’, said Gregory Mankiw.

According to Thomas Sowell, ‘the hybrid public-and-private nature of these activities amounts to privatizing profit and socializing risk since taxpayers get stuck with the tab when high-risk finances don’t work out.’

In other words, it is a travesty to say or imply that current crisis stems from market failure. The most troubling aspect of ever-increasing number of government bailouts is the subtle change overtaking the entire country.

The mindset of companies and individuals today is shifting away from self-responsibility. We blame everyone else for our mistakes and look to others (the taxpayer) to come to the rescue. When it comes to handouts and bailouts the government is no longer simply on the slippery slope– it’s in free-fall. Every bailout makes it harder to say no when the next TBTF request comes forward…

If you put all your eggs into one basket, you better watch that basket. ~Mark Twain