RISK AND REALITY: Part 5: Updating our Prediction, one year later; After the fall of LEHMAN BROTHERS.

Risk and Reality with Dr. Franco Oboni
http://www.riskope.com/

After the fall of LEHMAN BROTHERS.


Douglas Castle's Note: Dr. Franco Oboni, and his son, Cesar Oboni, are world-acclaimed risk evaluation and assessment consultants. The scope of their work is international, and involves analyses of virtually every possible avenue of business risk...from geological and political events, to commodity supplies and prices, to changing technology. Notably, one of their first functions should be obvious, but is not: Identify the areas of possible risk which need to be addressed.

As the Author of The Global Futurist, The Internationalist Page, GICBC and Braintenance Blogs, an ardent fan of Dr. Oboni's, and as the frequent editor of his articles, I believe that every business decision should be based upon its promise of possible profit (alliteration there, Beth Barany!) -- but I understand that risks need to be identified, and that pre-emptive contingency planning or risk mitigation, as appropriate, are a crucial component of good business decision making. When large institutions with substantial credit lines (or investor capital) "roll the dice" based upon an unexamined but seemingly promising idea [remember "derivatives], catastrophic failure, as in the case of the late, great Lehman Brothers, is inevitable.

When these failures are concealed, and when further gambling is undertaken to "win back" the lost stake, the problem is deferred, but compounded....and with tremendous interest. When we either neglect to examine the reason for these failures, or we seek means of subsidizing the very systems and controls, the status quo that made them occur, we encourage more of the same, exponentialize their "contagion" factor, and wind up in a state of utter economic chaos. Some interesting and recent revelations about the concealment of Lehman Brothers failure to address serious errors of judgment or to take immediate corrective action follow Dr. Oboni's article.

-- Douglas Castle, Strategic Planner and Organizational Engineer. ####

Do we change our prediction?

First of all, let's make it clear that we will not delve into endless theoretical or rhetorical discussions bearing on “is this recession now finished?" - or- "Are we going to have a 'double dip'?" - or - "Are we still in the same recession”? [by "double dip," we mean the backlash of inflation and interest rates due o the government's taking of certain actions (actually, reactions) to the crisis which first came to light upon the announcement of the collapse of Lehman Brothers.]

These would be, in our minds, futile and academic discussions, based upon semantics. We are interested in knowing when we will be out of it and care very little to know if there will be another up and down, or more in the way.

Furthermore, remember that our prediction is not a financial prediction, but a more general one, as explained in the prior Parts in this Series, and the parameters that we are looking at do not have the same volatility than indexes like the Dow-Jones. The DJ may go up and down 10% per day, but unemployment and consumers' well-being take longer to change and are of much greater significance in both the short and longer-run....

It is quite obvious that the data we are analyzing these days do not lead us, for the moment, to change our prediction of calamity. If anything, some of these short-term volatile stistics actually point out to a possibly longer and more painful solution to the situation than we had originally forecast.

-- Dr. Franco Oboni
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Douglas Castle's Note: Some interesting revelations about the fall of the "Too Big To Fail" House of Lehman follow, courtesy of Yahoo News! and The New York Times. Please read the green print carefully (it's difficult to see), and note the trend.

Report Shows How, Collapsing, Lehman Hid Woes

It is the Wall Street equivalent of a coroner's report -- a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing... (Click to read this story).

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For more information, please visit Franco's TNNW Bio.



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RISK AND REALITY: Part 5: Updating our Prediction, one year later; After the fall of LEHMAN BROTHERS.

RISK AND REALITY: Part 3: Updating Our Prediction, One Year Later -- After The Fall Of Lehman Brothers

Risk and Reality with Dr. Franco Oboni

http://www.riskope.com/

Measurements of Magnitude


In the wake of the Lehman Brothers' unprecedented fall, as we had discussed previously, we decided to conduct a risk assessment of the potential for various factors relating to the probability of a domino-effect recession throughout the world. In the previous issues we talked about our prediction of the length and other impact variables of the recession which were to follow the catastrophic event. In this issue, we don't have to talk about the likelihood of the "earthquake." We want to talk about its severity, i.e. -- just how deep would the "crack" be?

As a measurement of the probable Depth of Recession, we selected the “loss of service and control” in a “G20- type country” system, rather than by using the usual financial indicators. As a matter of fact, the review of 200 years of socio-economic history clearly shows that finance and societal well-being do not always precisely follow the same time scales.

We used simple terms to define the damage, to allow readers to easily get a mental image of what we meant when we defined the various increasing levels of “loss of service and control” as follows:


1. The Blues, which corresponds in our case to the Status Quo, i.e. the state of affairs in November 2008, i.e. wide-spread budget cuts in the non- key services, for example, starting with culture, the arts, then spreading to to education; some protests and visible, newsworthy discontentment;

2. Generalized Poverty, high rate of unemployment (up to 10%-12%), poor to non-existent maintenance of civil systems, reduced health programs, reduction of salaries of public officers, increased protests, some criminality increase, and some increase in the level of violence;

3. Severe Impoverishment, extreme rate of unemployment (over 12%), severe reductions of public transportation offered, gradual replacement of police forces with armed forces patrolling, reduction of state-managed retirement plans, with more widespread and vociferous generalized protests and criminality increase, significantly escalating levels of violence;

4. Catastrophic Disruption (of Order and Quality of Life), global rioting, wide-spread criminality and sacking, and critical loss of control.


Reportedly, some countries in the G20 group had already passed the Status Quo level one year ago, but as we were developing this study for a “generalized” country within the group, we did not focus our attention on those particular cases.

Using the above four "Depth Of Recession" categories, it appears that a country in:

TB: the Blues, can be considered as a lightly damaged system;

GP: Generalized Poverty can be considered as in critical state, but still functioning; while a country having -

SI: Severe Impoverishment or CD: Catastrophic Disruption can be considered as in a “failed system state”.


The paucity of available data, quite common in our practice in any industry we work for, did not deter us from defining probabilities (which of course were not based on "proper" statistics, as they were not available).

To do the job, we used specific methods we have developed in the past (Appendix 2 in “Improving Sustainability through Reasonable Risk & Crisis Management" F. Oboni & C. Oboni, ISBN 978-0-9784462-0-8”, 2007), and used for many years while performing risk assessments around the world for a wide array of industries, but ironically, never for banks.


Based on the criteria that “the future does not equate to the past”, we adjusted historical durations and rates of occurrence, taking into account possible compounding of the (then) present recession with other future potential crises, such as oil reserves depletion and water scarcity, climate changes, and certain other variables which would have to, of necessity, be included in a forecasting model.

Interestingly enough, several months prior to the publication of this article, many people were beginning to speak about a possible “double dip” recession.

[Series To Be Continued]

- This article was written by internationally-acclaimed risk evaluation expert Dr. Franco Oboni, and edited by Douglas Castle for The National Networker Newsletter.






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RISK AND REALITY: Part 3: Updating Our Prediction, One Year Later -- After The Fall Of Lehman Brothers

RISK AND REALITY: Part 1: Updating Our Prediction, One Year Later -- After The Fall Of Lehman Brothers

Risk and Reality
with Dr. Franco Oboni

International Risk Assessment & Mitigation Strategies Consultant
foboni@riskope.com
www.riskope.com
Riskope Risk and Crisis Management Blog: http://foboni.wordpress.com/
www.slideshares.net/foboni
www.youtube.com/foboni

Note: We at TNNW are delighted to welcome back Dr. Franco Oboni, a highly-regarded international risk assessment and management consultant and his Featured Column: RISK AND REALITY. We urge you to read Dr. Oboni every month.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


Historical Fact: On 14-15 Sept 2008, Lehman Brothers went down in flames.

In the aftermath of Lehman Brothers crash, we published, on the internet, a forecast of the crisis' anticipated “duration and magnitude”.

Interestingly, only a handful of contacts asked us for clarification, or to provide further details regarding the scale of consequences we had applied in making this forecast (i.e., is it linked to stock markets?... to financial indicators?)...

Perhaps, no one believed that reasonable predictions could actually be made, or that the initial event was merely "an aberration".

As we were publishing our prediction, we were indeed already seeing in the media statements reporting that “quantitative models were wrong” and other equally dismissive or inflammatory statements. As usual, in panic/emergency situations, our society tends to react with little finesse (which is, by the way one reason why Crisis Management Plans are so important to implement BEFORE a crisis).

“Models” as a whole were discredited in the eyes of many readers and “forecasters”, and anyone who actually believed that events could be inferred or anticipated using modeling were then then seen as pariahs and became personae non grata.

Apparently no one bothered to differentiate among different types and qualities of models, i.e., to say that “some models” are plainly wrong or had been very poorly used, but that others could be quite accurate if applied properly.

No one mentioned that maybe some ruthless people in the past had abused models in order to get the replies or predetermined outcomes that they wanted (we have seen the same happen in fields as different from financial forecasts as humanitarian Deming, and we have even published papers on this subject as well as others).

In the next issues we will summarize our prediction as it was made a bit over one year ago immediately after the fall of the venerable House Of Lehman, and we will analyze how it has actually stood up, having had one additional year of history behind us to evaluate it.

-- Franco Oboni

For more information, please visit Franco's TNNW Bio.






Published by THE NATIONAL NETWORKER Newsletter. All rights reserved. Subscribe Free For Your TNNW Newsletter and THE BLUE MONDAY REPORT! - Click HERE.
The National Networker Companies
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RISK AND REALITY: Part 1: Updating Our Prediction, One Year Later -- After The Fall Of Lehman Brothers