Risk Management At AIG: A Few Choice Words

I’ve been busy studying Depression-era slang. Apparently, that historic period gave us “boondoggle” (1935), “baloney” (1928) and “cojones” (1932).

But I took a break to check out the term sheet for Treasury's latest deal with our friends at AIG: last week's $40 billion preferred stock investment, which, per Treasury's press release, is “part of a comprehensive plan to restructure federal assistance to the systemically important company.”

Having sold us taxpayers this nifty preferred stock, AIG has a month to “establish...a risk management committee of... AIG’s Board of Directors that will oversee the major risks involved in AIG’s business operations and review AIG’s actions to mitigate and manage those risks.”

I take it, then, that AIG - whose risky deals have made it a recidivist recipient of behemoth bailouts - still does not, um, have such a risk management committee? And that Mr. Paulson didn't make them set one up when he lent them $85 billion in September?

How is this even possible?

Hank, Hank, Hank. This is the kind of thing that makes folks think this bailout boondoggle is a buncha baloney. Go and get yourself some cojones, before it's too late.

Carl Icahn Starts a Club

A couple of weeks ago I mentioned Carl Icahn’s rant about big fat lazy do-nothing rubber-stamping corporate boards.

Since then, some of us have become distracted by other events, but not Carl. He’s continued blogging heartily about the clueless and lackadaisical behavior of nicely paid outside directors. And, hey, it's hard to argue with that one. Check out his latest post on Lehman. (How mean of Nell Minow to note, during last week's Congressional hearing, that the risk management committee of Lehman’s board met only twice a year during 2006 and 2007, and how mean of Carl to repeat it.)

But while CEOs like Richard Fuld sweat before Congress, and Anderson Cooper broadcasts mug shots of his "10 Most Wanted: Culprits of the Collapse," boards have mostly gone missing from the rogues' gallery.

So when the angry torch-carrying mob passes by, Carl will be there to wave it in the direction of directors. (“Get ‘em, guys! They’re up in the skybox!”) To that end, he's forming a new group, the United Shareholders of America. The idea is to get enough pissed-off shareholders together to counter folks like the Business Roundtable, who have gloriously defended entrenched boards against compensation caps, proxy access and other threats to the American way of life.

If you're so inclined, you can join the group right on Carl's blog.

I know why he's calling it United Shareholders of America. Those wasteful managers who make Carl so mad should watch and learn, because he sure knows how to save money. Every time Joe Sixpack yells “USA” at a political rally, Carl’s group gets free publicity.

Image source: epikwhite

Reader's Digest Covers Its Ears

I, like the Dow Jones average, stupidly assumed the House would pass that bailout. Now I’m mad. I can overlook the fact that my kids’ college savings are melting faster than this town in Alaska, but knowing I wasted several hours reading a 110-page bill and drafting a blog post about it has jacked my Outrage Index up to Lou Dobbs levels.

This, BTW, is not that blog post.

If the House of Representatives can afford to take a day off from fretting about financial Armageddon, surely Proxyland can too. So this seems like a good time to post about a random SEC filing.

Apparently, talk of increased regulation is bad news for Reader’s Digest Association. According to its 10-K, filed yesterday, the mere utterance of the R-word threatens the firm's financial health:

"Our results could... be adversely affected because of public statements or actions by market participants, government officials and others who may be advocates of increased regulation, regulatory scrutiny or litigation. "

Given the number of lips now flapping on these particular subjects, poor Reader’s Digest could be in for some rough months. Fortunately private investors acquired the company last year, so the rest of us can’t further screw up our equity portfolios by investing in it.

OK, here comes a confession of ignorance. The sentence quoted above comes from a paragraph in the MD&A that seems somehow to relate to the performance of Standard & Poor’s. Despite applying my finely honed seat-of-the-pants research techniques, I still can’t figure out what on earth S & P, a McGraw-Hill subsidiary, is doing in this Reader's Digest 10-K.

The world is so confusing lately, and not just to Sarah Palin.

Image source: nbc.com

Buffett and Icahn Scold Directors

I don’t get the sense that Carl Icahn and Warren Buffett hang out together. But as they watch Hank Paulson's new game show, "So You Want To Be A Risky Mortgage-Related Products Investor," both are suggesting that outside directors get paid too much.

The two have different styles: While Carl rants, Warren usually stays calm and lets his BFF Charlie Munger say the really mean stuff. So Carl trashed overpaid directors in a peevish blog post, and Warren chided them gently in an interview.

Take it, Carl:

"Total director remuneration at the largest American corporations is running over $1,000 per hour, according to the study by Steven Hall & Partners. With many U.S. corporations struggling, why are we paying board members all this money? Lehman's board members, for example, were paid just short of a half million dollars each last year...I would appreciate it if someone would advise me of what those board members did to deserve that compensation? Can any board member of these collapsed financial institutions claim to have truly monitored the risks their companies were taking?...If the boards did their jobs, many of the problems today would probably not exist."

Warren?

"I think they should punish, in many cases, the people -- I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years...."

I'll take Carl’s word for it that Lehman paid its directors nearly $500K a year. Definitely on the high side. I checked AIG's last proxy, and its directors all made north of $250K. Not astronomical, but Robert Willumstad (who was non-management Chairman at the time) raked in $435K.

AIG was also kind enough to donate over $500K last year to the Asia Society, an organization chaired by another outside director, Richard Holbrooke. (He resigned from AIG's board this past July.) The proxy proclaimed that this donation wouldn't impair Mr. Holbrooke’s independence in the least, plus it would “enhance AIG’s reputation and standing in Asia.” Dunno, the Asia Society is a lovely institution, and located right around the corner from my dentist, but I wonder how that reputation thing is working out.


Image source: Turbo Squid

Pay It Backward, Paulson

Dropping by the Senate Banking Committee this morning, Hank Paulson pointed his bony Ghost of Christmas Future finger at both "bad lending practices by banks" and "borrowers taking out mortgages they couldn’t afford."

Fascinating, how the current woes of Wall Street megatitans are linked to low-income borrowers at the opposite end of the socioeconomic spectrum. It's like a hokey movie where, through some improbable plot device, two people who can't stand each other get handcuffed back-to-back and must work together to escape.

Here’s a suggestion, Congress. Don't try to put limits on Wall Street compensation; there's no time to structure them properly, and lawyers and consultants will just loophole their way out. Instead, claw back some of the millions Wall Street CEOs earned over the past few years and use them to backstop mortgage payments for those who face foreclosure.

Under my French Revolution Plan, everyone wins. Folks will keep their homes, and with mortgage payments assured, the market for mortgage-related junk should become more liquid. The credit markets will thaw, the stock market will rise. The election will go back to being a silly spat about - what was it, bitter lipstick? Even my hair will cooperate. What a lovely dream.

Sure, I'm advocating a pure redistribution of wealth. Sure, it’s socialism. But so is Prime Minister Paulson’s plan. The time has come for extreme and dangerous action, whether it's a size XXXL government bailout that might or might not work, or women sporting jumpsuits in public.

Wall Street Unfair to Computers

It’s Friday and I’m feeling opinionated. And poor. Poor and opinionated.

For my money - or whatever’s left of it when the seas stop boiling – this post yesterday by NYT technology blogger Saul Hansell (“How Wall Street Lied to Its Computers”) contains the key to The Great Financial Folderol of 2008.

I highly recommend reading the whole thing. Hansell’s point, gleaned from experts and insiders, is that “the people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data.”

This isn't exactly news here at Proxyland, where "risk management" was last year's Oxymoron of the Year. Firms created cool structured products and used fancy computer models to evaluate the risks they carried, but this was a case of modeling while intoxicated. Drunk on greed, arrogance, and self-serving optimism, people excluded from their models those scenarios that might be too depressing. To their bonuses, I mean.

Sure, this crisis has other contributing causes, like cheesy capital requirements and greasy mortgage brokers. However, as they teach you in law school, there’s this thing called “but for” causation. Here’s how it works: But for Wall Street’s irresponsible behavior, I wouldn't have been too jittery this week to enjoy the season premiere of House.

Not everyone on the Street screwed up, of course, and many honest, conscientious souls work there. But given the popularity of structured products and the domino-ish nature of financial failure, it only took a few wise guys to mess it up for everyone.

As the bumper sticker says, “shit happens.” Now that’s what I call a risk model.

Positively Wall Street

As secrets go, "The Secret" seems rather heavily advertised. In case you’ve somehow missed the DVDs, books and "scrolls," here's the gist: Just radiate positivity and you'll attract good fortune the way an open Coke can at a picnic attracts bees.

Some corporate PR people seem to believe in The Secret -- or, as we call it here at Proxyland, The Power of Positive Press Releasing. But, as Floyd Norris pointed out in his NYT column last week, too much positivity can become a negative.

Norris says Lehman’s public statements about its capital situation turned out, over and over, to be way too cheery. He believes this created distrust, scared off possible saviors and left the firm isolated at its ultimate moment of crisis. (Of course, methods for valuing illiquid paper being touchy-feely, Lehman may have genuinely convinced itself its positions weren't really doing so badly.)

These observations prompted me to wonder where WaMu ranks on the positivity index these days.

Well, it sounded pretty perky in its Friday press release, entitled "Update on Expectations for Third Quarter Performance." (At least these guys were nice enough to give us an update; Lehman, by contrast, clammed up between its 10-Q filing on July 10 and its "don't worry, we're restructuring" press release on September 10.) But WaMu did include a warning not found in its earlier releases:

The company expects market conditions to remain volatile during September and therefore the actual third quarter results could differ materially from the third quarter earnings outlook provided above.

Although this looks like the “forward-looking statements” crap everyone sticks in their earnings releases, WaMu's warning is more pointed. It rubs our noses in the uncertainties of this particular quarter, or what you might call “the fierce urgency of now.”

Lehman, writes Norris, was the opposite of the boy who cried wolf. It's left us with a new bedtime story: The Boy Who Held Conference Calls and Said Rumors of a Wolf Were Overblown. The ending, as in many morality tales, is rather gruesome.
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Explanatory note/excuse: I drafted this post early Sunday, so it doesn't mention certain newsworthy developments of this morning. On that score, let's just say I'm rethinking my vote in Friday's "what scares you most" poll, especially since Fashion Week is actually over.

Lehman Beats Palin

Strange, that business about Sarah Palin and the hapless Bristol. Imagine squelching rumors that your unwed teenage daughter had secretly given birth by retorting that this was impossible because said teenage daughter was pregnant at the time. Take that, rumor mill! Even the National Enquirer was left sputtering.

Still, Palin is a piker, rumor-wise, when compared with Lehman Brothers. Month after scary month, this firm has been fighting countless rumors of its imminent implosion. With recent talk of a 3Q loss that’s likely to be large, the situation has progressed from rumors to frequent press reports on the firm’s schemes to locate capital and perhaps, per Friday’s New York Times, to take a cleaver to itself and hack off the “bad” parts.

Though nicer than Bear Stearns, Lehman - unlike Ms. Palin - was never voted Miss Congeniality by its rivals. It probably doesn’t have many favors it can cash in at this point.

Lehman popped up in the tale of Thursday’s tougher-than-expected move by the European Central Bank. Thanks to abuses by some financial institutions to which it lends money, the bank will start hacking away at the valuations for asset-backed securities used as loan collateral. One of the folks fingered for “gaming the system” (in the ECB’s phrasing) is our old friend Lehman. According to the Financial Times, Lehman cleverly created "a huge collateralised loan obligation of risky buy-out debt to use at the central bank.”

While it’s not the only ECB offender (Macquarie Bank apparently used paper backed by – quelle horreur – Australian car loans), Lehman is looking like that kid in school who acts like a smartass and causes the teacher to punish the whole class. It's the kind of behavior that makes other kids unwilling to provide you with needed capital, and quite likely to spread nasty rumors about you.

Under the Influence

Blogging - a lonely existence - may lead to poor mental health. We bloggers tend to ricochet back and forth between two poles of self-esteem: either I’M JUST A STUPID DWEEB AND NO ONE CARES WHAT I THINK, or YES! I’M CONTROLLING THE WORLD!

Lately I’ve been prone to the latter, thanks to two events: (a) the sudden appearance of copious amounts of toilet paper at my local Rite Aid after I posted this Rite Aid rant at Footnoted, and (b) a front-page Wall Street Journal story on an oddball phenomenon I’d already written about, which inspired the self-aggrandizing thought that an esteemed publication had shoplifted my idea.

Continuing in this vein, here are two more examples of Proxyland’s awesome influence:

Example #1:

Not long ago Proxyland said: Man, the reporting lines for Morgan Stanley’s risk management function have been really screwed up. Having risk managers report to traders makes about as much sense as having Lindsay Lohan report to Britney Spears.

Behold: Today, Morgan Stanley announced that it’s hired a new head of risk management and established independent reporting lines for the risk guys.

Example #2:

Not long ago Proxyland said: We’d really love it if compensation committees would pay some attention to the amount of wealth that managers have built up over the years through equity awards.

Behold: In its proxy filed last week, Wrigley (WWY) wrote that its Compensation Committee reviews tally sheets showing each executive’s “accumulated wealth” (assuming various stock prices) and uses this analysis “to assess the overall reasonableness of its past compensation decisions.” Even though they went on to say they weren’t using the tally sheets to determine current compensation (which makes one wonder what exactly was the point of the exercise), they did in some sense do what Proxyland had asked.

Gosh, why am I going on like this? After all, I’m just a stupid dweeb and no one cares what I think.

Over There

Here at Proxyland I leave heavy number-crunching to the experts. Which is good, because some numbers in the 4th quarter 6-K that UBS (UBS) filed yesterday are painful to look at, including this one: $13.7 billion in mortgage-related write-offs.

So I'm just skimming through the company’s narrative, which turns out to contain some intriguing words and phrases, e.g.:

"Monoline exposures" - In happier times, the word “monoline” could have had a nice career as a brand name for a 1950s vacuum cleaner, or some such thing. Sadly, however, it refers to monoline insurers, so called because they insure a single industry. Here, the industry we’re talking about is securitization (if you can call that an industry), and the monolines are poor unfortunate bond insurers like FGIC and Ambac.

The phrase “monoline exposures” ought to be oxymoronic. These are insurers. They’re not supposed to be exposing your ass; they’re supposed to be covering it, right? Yet here comes UBS with a nifty chart of its monoline exposures, which add up to (holy cow) $3.6 billion.

The word “monoline,” of course, never appeared in any UBS filing until yesterday.

“Devastating" - This one jumped out at me from the letter to shareholders signed by Chairman Marcel Ospel and CEO Marcel Rohner, who sheepishly admitted there had been a “devastating development in our Investment Bank’s US residential mortgage business.”

Being European, Messrs. Ospel and Rohner may not realize we Americans aren’t used to hearing corporations use words like "devastating" when delivering bad news. Les Deux Marcels really should be more culturally sensitive to our delicate ears. What, do they not know about headwinds over there in Switzerland? I believe they do know something about cows, so if UBS looks down it may find a softer word for what it has stepped in.

Setting an Example

What a difference an e.g. makes.

In the risk factors section of its 2006 10-K, filed about a year ago, Morgan Stanley included what then seemed a snoreworthy statement about its risk management practices: “Some of our methods of managing risk are based upon our use of observed historical market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate.”

The same words appeared in Morgan’s 2007 10-K, filed last week, but the firm tacked on at the end this parenthetical: “(e.g., recent events in the U.S. subprime residential mortgage market).”

I’m kind of an example lover, myself; I find many concepts easier to understand when someone gives me a “for instance.” So thank you, subprime meltdown, for serving as a “for instance” that has added immeasurably to the world’s understanding of the art of risk management. (Risk management was, of course, named Oxymoron of the Year here at Proxyland.)

The crash of subprime-linked debt, Morgan explains in a spanky new section in this year's 10-K, has been “among the most significant market shocks ever realized… Events of this magnitude are outside of the loss estimates forecast by VaR models and are more commonly measured by alternative risk measures such as stress tests and scenario analyses. However, the market moves associated with the subprime events of 2007 were significantly greater than those included in the Company's stress tests and scenario analyses at that time.”

So we’ve now learned - by example - that the models, stress tests and scenario analyses financial firms use to measure risk are, well, models, stress tests and scenario analyses. Such educated guesses may miss the mark even when made by highly credentialed, nicely dressed folks like those who work at Morgan Stanley. Morgan's risk managers perhaps envisioned a kinder world than the one we live in, a place where mortgages would be repaid even when borrowers lacked the means to make payments. In that world, Amy Winehouse never smoked crack, Kate Hudson did not wear this dress, and my plumber did NOT charge me $350 to replace a stupid bathroom sink. Just for instance.

Dry Spell

Being a non-economist but a trained econopessimist, I'm anxious to start blogging about The Great Recession of 2008. But first I must indulge in one quick follow-up to the previous post on global warming disclosure, after which I promise to forget about climate change, even though it’s January and one of my kids swears he got a mosquito bite. Not to worry, I told him; probably just a bedbug.

Anyhoo, in the last post I quoted a real lawyer who shared my puzzlement at the failure of climate change to show up in many SEC filings where it might seem appropriate. Here's another example: this 10-Q filed by National Beef Packing Company, the fourth largest beef processor in the country. (National Beef's stock isn't publicly traded, but they do all the usual filings, I assume because of debt issuances.)

OK, I’m no cowgirl, but doesn’t this sound sad? "The cattle herd in the United States (U.S.) remains in a no-growth phase. Following the drought of 2006 in the central U.S., an extreme dryness in the southeastern states resulted in cow herd liquidation in that region during 2007. Retention of females to replenish and grow the U.S. cattle herd remains slow, resulting in long-term cattle supplies that show no appreciable sign of growth in overall fed cattle supplies over the next two to three years."

If I’m understanding this rancher talk, severe drought has played a major role in triggering a multi-year “no-growth phase” in supplies of the only commodity National Beef packages and sells. Yet nowhere in this 10-Q, or the 10-K the company filed in November, does it highlight weather-related risks. (The word "weather" is casually thrown in as one of the factors affecting cattle pricing, but that's it.)

The firm did list as a risk factor its need to comply with pesky environmental regulations, a beef it shares with our good friends at the U.S. Chamber of Commerce.

Whaddya Know?

There came a point late last month when my efforts to ignore the holidays (fingers in my ears, singing la la la) left me with insufficient energy to ignore the Presidential race. Then came the Iowa upsets, and next thing you know I'm watching CNN.

Escape is impossible anyway, as this country is so politicized that even a boring subject like SEC disclosure can stir red state/blue state passions. Not long ago I wrote a post for Footnoted wondering why the potential business impact of climate change wasn’t popping up in more SEC filings. Of course, I wasn’t the only one wondering that. But it’s one thing to hear this complaint from the kind of people who tote their own hemp shopping bags to Trader Joe’s, and another to hear it from a regular suit-wearing lawyer.

I stumbled today on this article on climate change disclosure by Peter Gray, a partner at a fancy Washington law firm. Writing in a trade publication, Mr. Gray begins with this disclaimer: "The author is not responsible for fits of rage or physical outbursts that readers may experience.” Exactly what in this scholarly piece is supposed to make people mad? I guess it's his sensible lawyerly conclusion that public companies must consider whether global warming is "reasonably likely to have a material impact on ... future financial performance," and if the answer is yes, say so.

It doesn’t matter, poor Mr. Gray feels obliged to add, “whether you believe human activities … are a cause of global warming.” Nor is it necessary to believe severe climate change is an absolute certainty, like the fact that someone in the Spears family will make a fool of herself in the near future. The MD&A (Management Discussion and Analysis), Mr. Gray notes, is supposed to consider “known material uncertainties.” Indeed, companies mention uncertainties in their MD&As all the time, like the prospect of more terrorist attacks on U.S. soil, or the possibility of civil unrest in the third world country to which they’ve outsourced your job. Yet, Mr. Gray points out, most insurance companies don't discuss the potential financial fallout if they're slammed with more Hurricane Katrinas.

The SEC disclosure rules assume, when speaking of "known uncertainties," that there's some consensus on what the meaning of "known" is. I feel like not long ago there was one, but now we're living in a time when many people scoff at mainstream science and Presidential candidates from a major party quibble with evolution. So some companies may just put their fingers in their ears and try to block out Al Gore for as long as humanly possible. La, la, la.

And the Winner Is...

You and I, dear readers, live life on a calendar year basis and not some weird-ass corporate fiscal year. So the time has come to name this blog's Oxymoron of the Year for 2007. No, I didn’t do this last year.

Had 2007 been a normal year in Proxyland (although normal here looks like the “n” in snafu), our winner would have been Proxy Access, a provocative idea that suffered a premature demise at the capable hands of SEC Chairman Cox. But this is no ordinary time, it seems. Whether you call it the credit calamity, subprime stew or mortgage mishegass, we’re looking at one hell of an ugly broken nail on the invisible hand that's supposed to control the free market. And no manicurist in sight.

This is serious stuff, so I'm going to declare a tie between Risk Management (discussed here) and Financial Engineering.

Take your pick, though the latter sounds more jolly, evoking a video game in which you send bits of risk zinging around the globe and wait for them to explode. And in the meantime you take your own credit-linked stash and, as some wag says in that cute poem you've probably seen, “mark to myth.”

Whichever oxymoron best captures the wisdom of the Wall Street sages who've made fortunes in structured finance, the moral is clear: Karma may not be a boomerang, but risk sure is.

A happy and prosperous New Year to all, come what may.

Where Have All the Profits Gone?

I’m just so tickled by this sentence in the Morgan Stanley (MS) press release yesterday: “Morgan Stanley, with the exception of its mortgage related businesses, delivered exceptionally strong performance this year.”

Yes, and with the exception of my face, hair and body, I look exactly like Angelina Jolie.

When some trades done by a single desk in a single quarter can lead - oops - to a $9 billion writedown (causing Morgan to join Merrill and Citi in the Mile High Mortgage-Related Losses Club), it’s time to add “risk management” to our list of oxymorons.

According to Morgan’s 2006 proxy, one of the jobs of its Audit Committee, and rightfully so, is to oversee the “integrity” of the firm’s risk management. It would be goofy to expect independent directors to take out their calculators and second-guess Morgan’s trading risk assessments, but maybe they could have given a bit more thought to the firm's reporting structure, because you don't need math for that.

Morgan’s risk managers apparently reported to the lately departed Zoe Cruz, who oversaw the firm’s trading as its Co-President. As Pete Seeger sang in the 60s, when will we ever learn? The Street long ago rescued compliance officers and in-house lawyers from so-called "business" reporting lines, and for good reason: Try telling a trader who is also your boss that, sorry, her latest brilliant bonus-driving deal is off because you, the earnest lawyer, have spotted a wee regulatory iceberg on the horizon. Risk managers, like lawyers, sometimes need to be spoilsports or worrywarts; these are tough roles to play, and even tougher when one is reporting to the head of the profit-making machine.

The morning after announcing the first quarterly loss in its 72-year lifespan, the usually well-groomed Morgan Stanley is looking a bit haggard. Of course, when Angelina is 72 she may not look so great either.

Boardroom Dramas

I’m looking forward to December's release of The Golden Compass even though it stars Nicole Kidman, who gets on my nerves. The movie is based on Philip Pullman's fantasy novel in which every human shares his or her soul with an animal sidekick, called a daemon.

It would be cool if outside directors had daemons - not in the form of animals, but nerdy accountants who would study the numbers and whisper in their ears at board meetings. But in the real world, this NY Times article published over the weekend asked whether Merrill Lynch’s board – more specifically, its finance and audit committees - had peered closely enough at the firm’s risk management practices.

The basic question, which goes well beyond Merrill and its $8.4 billion subprime-related charge (likely to be dwarfed by Citigroup’s writedown), is how much oversight outside directors can and should provide, short of becoming the corporate equivalent of “helicopter parents.”

It’s a question well worth asking (and, some may say, litigating). But Merrill's transactions were complex, which will make it really tough for a judge, or anyone else, to evaluate this board's actions; much tougher than it was in, say, the case against Disney's board a couple of years ago. If you remember that one, shareholders sued after the board obligingly blessed a $140M severance payment for Disney President Michael Ovitz, whom CEO Michael Eisner had hired with wild enthusiasm only 14 months earlier. (I still think someone should make a movie of the Eisner/Ovitz fallout called “Mean Girls II: The Senior Executives,” and it should include a re-enactment of the corporate outing at which, according to Mr. Eisner, Mr. Ovitz “declined to participate in group activities.”) Through a kindly interpretation of Delaware law, the judge managed not to hold Disney's directors liable, but he sure had the facts down.

Merrill’s debacle, by contrast, involves a multitude of intertwined mind-numbing financial dealings, and the board's oversight job was pretty challenging. It's odd that they didn't appoint a chief risk officer for the firm so there'd be someone to fire besides the CEO. But once you get past that simple observation, it will take a long time to sort out what this board did or didn't do wrong.

Some other Wall Street firms apparently did a better job of risk management than Merrill, thus staving off the evil armies of subprime-linked debt. We may never know what role, if any, outside directors played in this victory, and whether they had help from The Golden Compass’s armored bears.

Control Yourself

Existentialism, it seems, is all the rage. Last August the Summer Reading Club of Crawford, Texas tackled The Stranger by Camus. The philosophy is even seeping into SEC filings.

Thanks to Sarbanes-Oxley, public companies must have a system – termed "disclosure controls and procedures" - to ensure their SEC filings are complete and accurate. They need to figure out what info they must include and how it will all get from their employees’ pointy little heads into the SEC’s mailbox.

Icon Income Fund Nine, LLC, a member of the ICON Advisers, Inc. mutual fund family, admitted last year that its disclosure controls and procedures were flawed. But the fund reports in its third-quarter 10-Q that they’ve hired a couple more CPAs and think they’ve got this licked.

Lest we get too excited, Icon wants us to know that the SEC, applying my mother’s "nobody’s perfect" principle, says a company’s controls need only "reasonably assure" that everything gets reported. The 10-Q explores the depths of this concept:

"Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our...disclosure controls and procedures have been designed to meet reasonable assurance standards. Disclosure controls and procedures cannot detect or prevent all error and fraud. Some inherent limitations in disclosure controls and procedures include costs of implementation, faulty decision-making, simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all anticipated and unanticipated future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with established Policies or procedures."

Jeez Louise, enough already! You had me at "reasonable assurance standards."

Look, we read Sartre in college. We get what you’re trying to say. DEAR INVESTOR: YOU EXIST IN A CHAOTIC AND PURPOSELESS UNIVERSE. OUR PROCEDURES, AND EVERYTHING ELSE YOU BELIEVE IN, ARE MERELY AN ILLUSION. GOT IT? YOU’RE ON YOUR OWN.

The Good, the Bad and the Silly

From time to time we’ve complained about "risk factors" disclosure that degenerates into useless hand-wringing. Like geriatrics gleefully listing their ailments, some companies like to regale us with every awful scenario they can dream up. Yawn, yawn, we already know that there might be a terrorist attack, the world’s economy could tank or some CEO's brilliant strategic plan might turn out not to be.

We would however, enjoy seeing more companies mention a certain risk factor that Greenbrier Companies, Inc. (GBX) lists in its recent 10-K: "Our governing documents contain some provisions that may prevent or make more difficult an attempt to acquire us." Here they generously confess to having a staggered board of directors, a stockholder rights plan and other nifty devices designed to keep the joint from getting taken over. I find this quite commendable; while the company has presumably disclosed this stuff in bits and pieces, it's useful for investors to get it all in one place.

My giddy fling with Greenbrier, however, ended quickly when I happened to glance at President/CEO William Furman’s employment agreement. In my search for the most ridiculous contractual definition of what it takes to get fired for "Cause," Furman is the new American Idol. He only gets kicked out without his full severance package if he’s convicted of (or pleads nolo contendere to) "a felony or gross misdemeanor." But even then (and this is the kind of thing that makes a blogger want to get out of bed in the morning, though not before 9) the crime doesn’t count unless it’s "materially and demonstrably injurious to the Company" or "impairs the Executive’s ability to perform substantially the Executive’s duties." Wonderfully outrageous, and ungrammatical to boot.

First-Ever Blog Risk Factor Disclosure: This blog has only one writer. In the event she becomes temporarily overwhelmed by the unadulterated absurdity of certain people’s employment contracts, she may, without prior notice, take a week off to recover and catch up on her backlog of Lost episodes. In which case you’re on your own.

Red Alert

The venerable H. J. Heinz Company (HNZ), per its 10-K, has decided to pare its business down to three tried-and-true product lines: Ketchup & Sauces, Meals & Snacks, and Infant Food. To aid in this effort, late last year the company established an International Center for Excellence in Ketchup & Sauces, which serves, among other things, as "a knowledge base for tomatoes."

Well, I'm all for tomato education. And for excellence. But when it comes to drafting its Risk Factors disclosure, I'd give Heinz only a fair rating. As discussed in a previous post, the point of Risk Factors is to pinpoint risks of the particular business you're in, not to wax bleakly Dick Cheney-like about the world's problems. Yet Heinz notes (duh) that "its performance is affected by economic and political conditions" in the U.S. and elsewhere. And it mentions my favorite of all Unhelpful Risk Factors, potential "terrorist acts."

Well, the Department of Homeland Security has said it doesn't believe New York City contains any national monuments terrorists might be likely to target. Wonder how they feel about a condiment excellence center somewhere near Pittsburgh.

Fun With Risk Factors

Companies are grappling with the new requirement to list risk factors in their 10-Ks. Under SEC rules, they’re supposed to disclose the "most significant" things that make investment in the company "speculative or risky." The idea is to list risks specific to the company, not uncertainties that apply to any business.

Prospectuses have included risk factors for many years, but this disclosure is, it seems, far from an exact science. Case in point: the 10-K recently filed by International Display Works, Inc. (IDW).

Some of the risk factors IDW lists are the kind you’d expect to see, and arguably helpful to investors, like “we are subject to particularly lengthy sales cycles in some markets.” But how about these?

"Failure to optimize our manufacturing potential and cost structure could materially and adversely affect our business and operating results."

If we do not retain our key management personnel, our business will suffer."

"Potential strategic alliances may not achieve our objectives."

Don't many businesses face such challenges? Isn't this what running a company is all about, and why I'm not doing it? Unless IDW management views itself as unusually incompetent (or the poor fellows suffer from low self-esteem), I don’t know why this stuff is in here. It simply muddles up the disclosure of the real risk factors, the ones that Joe Investor might not be able to think of for himself.
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Take heart, IDW. You are the proud recipient of Proxyland's Wal-Mart Award for Unabashed Outsourcing, which I award whenever I feel like it. IDW, which manufactures its products entirely in China, earned the honor with this 10-K language: "We believe that our China-based operations provide us with a competitive cost structure and access to a highly educated engineering work force."

But doing business in China does have its drawbacks. Among the things IDW wants investors to fret about is the relationship between the date of the Chinese New Year (determined, I believe, by the full moon) and the end of the company’s fiscal quarter. Huh?