10 Things We Didn’t Learn from Enron

A great piece from ABC News lists 10 things that we should have but didn’t learn from Enron, on the 10th anniversary…

1. Conflicts of interest continue to occur
2. If it’s too good to be true, it probably isn’t
3. Regulators and the regulated continue their dance
4. Transparency is vital
5. More capital is better
6. Excessive leverage is as dangerous as a bad bet
7. Corporate leadership makes all the difference in the world–for good and for bad

8. Preferred stockholders get preferred treatment

9. Still building fragile financial structures

10. Important names make mistakes too

Riskviews comments:

1.  Conflicts – The risk manager should be aware of who benefits from each major program of the firm and who stands to lose if a program runs into trouble.  If those two parties are different, then there are strong incentives for abuse of the program.  Suggestions from a party that could benefit but not be at risk to change the program should be viewed very carefully.

2.  Too Good to be True – But this time is different!!!  The four most dangerous words.

3.  Regulators – someone needs to be able to identify and change situations where the regulators are too cozy with the regulated.  The myth that firms will self regulate was exposed to be a total falsehood in the 2008 Financial crisis.  Real regulation is needed in the financial services business where firms are primarily selling promises.  Whether you are Madoff or Lehman Brothers, the most lucrative approach for managers of a financial services firm is to make promises and not make sufficient provision for satisfying those promises.  Regulators need to assure the customers that a clear standard is maintained for security of those promises.

4.  Transparency – in RISKVIEWS opinion, real transparency is much better than supervision.  Market discipline is much more sure than regulatory discipline.  Because market counterparties have skin in the game.  Regulators actually have multiple agendas.  To date, transparency has never been tried, however.  But there are rumours that current depressed bank valuations are in part a market reaction to the fundamental lack of transparency of the banks.  RISKVIEWS hopes that one of the banks tries to be transparent and shows the rest of the sector what happens to their valuation.  US insurers have operated with extremely high transparency for some risks but total lack of transparency for others.  RISKVIEWS hopes that the insurance regulators will stop being agreeable to that situation.

5.  More Capital &

6.  Excessive Leverage  –  these two points are the same.  More capital is less risky, More leverare is more risky.

7.  Leadership – In most companies, leadership is more aggressive than the rank and file of the firm.  And the risk reward equation for top management and the rank and file is totally different as well.  See #1, above.

8.  Preferred Treatment – Why doesn’t the SEC simply mandate disclosure of who gets paid what under different scenarios.  And mandate that be disclosed to new purchasers of a security?  At least to those who intend to hold the security for more than 15 minutes.

9.  Fragile structures – Insurers and banks are being asked to present “stress to failure” tests to show regulators what degree of stress would cause them to fail.  Perhaps that would be a good disclosure for investors as well.  What sort of stress causes a structure to fail?

10.  Mistakes – This is a good reason for diversification.  Into totally different sorts of investments in totally different sectors.  Mistakes can be made from entire secotrs, as we saw in the financial crisis.

But read the ABC comments.  They are all good as well.

Explore posts in the same categories: Enterprise Risk Management

Tags: ,

You can comment below, or link to this permanent URL from your own site.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: