In the Eye of the Storm

Who would you pick if you had the choice of moving someone now - planned, controlled, with very good medical assets - versus going out like Katrina?

Of all the ghosts of Hurricane Katrina three years, perhaps the most haunting was the specter of vulnerable residents suffering and dying at home and in hospitals and nursing homes before help arrived.

Hospitals became furnaces as they lost power in the summer heat, surrounded by water and cut off from communications.

Few times in American civilian history have health workers faced such horrific conditions and wrenching choices over whom to save first when rescue boats and helicopters were slow to arrive.

As Hurricane Gustav approached the southern Louisiana coastline last month, an estimated 10,000 hospital, nursing home and home-based special needs patients were moved by plane, helicopter, bus, car, ambulance and train to areas farther north.

Local, state and federal officials coordinated with each other and with private groups to accomplish the evacuation.

It was the largest pre-storm medical evacuation in American history and it sought to address many of the lessons learnt from the August 2006 Presidential Panel into Hurricane Katrina:
http://www.whitehouse.gov/reports/katrina-lessons-learned.pdf

***

Hospital administrators swore their facilities would be better prepared for the next storm. Among them was Robert Lynch, CEO of Tulane University Hospital.

Some of them, including Lynch, had watched three years ago when Lake Ponchartrain flooded the hospital's generator, knocking out all the facility's power.

For days, staff labored in extreme heat until all the 1,600 people who had sheltered at the hospital were flown by helicopter off the top floor of its parking garage. Bed-bound patients were carried down staircases on mattresses.

This time, as the storm threatened, hospital officials discharged patients who were capable of going home and told staff to find other accommodations for their own family members and pets.

That left only about 430 people to be evacuated from the main campus if the levees failed again. The Lakeside campus was down to just a few high-risk pregnant mothers and babies.

Generators at the main campus had been raised high above the ground, and a larger fuel tank installed, along with flood gates and pumps. And there was another difference.

Many of the hospital's critically ill patients and those who rely on electricity-powered technology, such as dialysis machines, were being evacuated to other cities that officials expected would be safer.

Doctors used medical judgment when choosing whom to evacuate.

The bottom line, Lynch said, was this: "Who would you pick if you had the choice of moving someone now—planned, controlled, with very good medical assets like a mobile ICU -- versus going out like Katrina?"

When the air evacuation teams arrived, many weren't prepared to transport the most critically ill.

In the end, many of the sickest patients had to be transported by ground. Although careful plans had been established in recent years to evacuate individual regions of the state, "we never planned to evacuate the whole southern coast of Louisiana."

Hours later, Gustav's eye hit the Louisiana coastline.

Of the 18 deaths attributed to the storm, eight were medical evacuees. Some might have been caused by accidents, and others probably couldn't have been prevented.

Although "many of the eight might have died (regardless of being evacuated) because they were that sick, it makes you think hard," Lynch said.

"The decision to evacuate is extremely, extremely difficult."

***

Hurricane Gustav provides an interesting example of a disaster planning being put into effect.

It also challenges the reader to assess how broad their disaster planning efforts should be – for as the narrative notes there was never an expectation in any disaster planning scenarios that the whole southern coast of Louisiana would be evacuated.

Too small a scope and one’s disaster planning / disaster recovery and business continuity plans are useless.

Too broad a scope pushes the imagination of the plan’s designer to consider all elements.

What is your corporate equivalent of evacuating the whole southern coast of Louisiana?

(Based on article In the Eye of the Storm by Sheri Fink – ProPublica – September 4th 2008)

The Start of the Housing Bubble - Thursday 30th September 1999

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times.

But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue.

By now many words have been written on the end of the United States housing bubble and its impact on the American and world financial system.

But where did it start?

The article reproduced below offers some insights and dates specifically the start of the bubble to Thursday 30th September 1999.

Within its 802 words, the article from the New York Times provides a fascinating understanding of the impending risk management issues that ultimately manifested themselves in what has been described as the greatest crisis to the financial system since the 1930s.

With hindsight comments such as the following lifted directly from the article should have sent off alarm bells within companies and with regulators.

It didn't.

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

Will encourage banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These are borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

New mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

You can't say that we weren't warned.

***

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

The China Milk Contamination Scandal

The greatest risk in joint ventures is reputational risk and it is usually the most difficult to manage.

The China milk contamination scandal is continuing to develop as we write.

It is a food safety incident in China where milk and infant formula had been adulterated with melamine, a chemical which causes kidney stones.

The adulterated milk products have claimed several thousand victims: at least four infant deaths and in excess of 6,200 children affected, with many said to be "in serious condition".

After the initial focus on Sanlu Group, the market leader, government inspections revealed the problem existed to a lesser degree in products from 22 other companies.

Fonterra – New Zealand’s largest company by turnover and the sixth largest diary company in the world – owns a 43% stake in Sanlu.

The Sanlu board, which has three Fonterra directors, was first advised on August 2 that there was a problem with the contamination of infant formula.

A trade recall was begun on that day and a public recall a week ago. The Chinese government is now recalling all Sanlu products.

***

This is a blog not so much about the incident – tragic as it is – but the situation that Fonterra found itself in as a joint venturer in China and how it has handled themselves to date.

Fonterra said it would have preferred a public recall of milk powder in China earlier but its joint venture partner Sanlu had to abide by Chinese rules.

On 15th September the Fonterra Chief Executive Officer, Andrew Ferrier, held a conference call to discuss the matter.

He was repeatedly asked why Fonterra did not go public itself earlier and he replied that it would have been irresponsible for Sanlu not to have followed the guidelines of Chinese authorities.

"I can look myself in the mirror and say Fonterra acted absolutely responsibly in this one. If you don't follow the rules of an individual market place then I think you are getting irresponsible. "

"We as a minority shareholder had to continue to push Sanlu. Sanlu had to work with their own government to follow the procedures that they were given," he said.

***

The situation raises questions as to what processes need to be in place in joint ventures to ensure that the highest standards are in place when things go wrong.

Additionally it also challenges the partners to a joint venture to consider what one needs to do in instances where the response of a joint venture partner (in this instance Sanlu not being in a position for whatever reason to publicly recall the products) is not at or below the standard expected in the joint venturer’s home jurisdictions (ie – New Zealand).

When it comes down to a joint venture the biggest risk - and the one that is the hardest to control - is reputational risk.

Subprime: The Reshaping of Wall Street

We’ve re-established ‘moral hazard’ … is that a good thing or a bad thing? We’re about to find out.

On September 16, 2008 the Wall Street Journal started an article on the demise of Lehman Brothers together with the takeover of Merrill Lynch with the sentence “more than 200 years after it was born at the base of a buttonwood tree, Wall Street as we have known it is ceasing to exist”.

How has it come to this?

The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values – the “sub prime crisis”.

Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.

The term subprime lending refers to the practice of making loans to borrowers who do not quality for market interest rates due to various risk factors such as income level, size of the down payment made, credit history and employment status.

The Wall Street Journal in October 2007 traced the impact of one subprime loan from its ultimate recipient through to its ultimate funder.

This is a story of inadequate risk assessment, poor risk monitoring and a lax governance and regulatory environment that let it happen.

***

Three years ago, Colorado truck driver Roger Rodriguez was in the market for a new mortgage loan. With radio and Internet ads trumpeting easy approvals, he picked up the phone.

That call set into motion Mr. Rodriguez's descent into the subprime mortgage mess.

Over the next several months, his adjustable-rate loan passed through many hands.

These included a local Denver broker, Livingston, N.J., finance company CIT Group Inc. and a Greenwich, Conn., unit of Royal Bank of Scotland Group PLC.

Eventually, a piece of Mr. Rodriguez's loan landed in mutual funds run by a Tennessee investor named James C. Kelsoe Jr.

Little good has come to any party that touched the loan.

Mr. Rodriguez, now 61 years old, has lost both his job and his home.

All the middlemen have either shuttered their mortgage businesses or are struggling.

Mr. Kelsoe, once a star mutual-fund manager, has hit a career low as defaults on subprime mortgages decreased the value of his investments.

***

Much of the mortgage lending of the past several years, as well as investments in mortgage-backed securities, was based on assumptions that left little room for error.

As a result, even slight deviations from a perfect world -- in which people act prudently, unemployment stays low, lenders keep lending and house prices rise -- pose risks in the form of more defaults, foreclosures and other investment losses.

Behind the market turmoil of recent months: Lending standards were more lax than most people imagined, a fact that surfaced when house prices stalled.

The mortgage crisis is "a case study on the way that greed convinced everyone there wasn't risk," says Ivy Zelman, CEO of Zelman & Associates, an independent real-estate research firm.

Back in 2004, Mr. Rodriguez didn't realize he was meandering into trouble.

Two decades earlier, he had moved from Powell, Wyo., to start a new life in Colorado after struggling as a sugar-beet farmer.

He, his wife, Irene, and two grandchildren, now 4 and 12, took up residence in a modest development called Prospector's Point in the town of Westminster, where their home boasted unobstructed Rocky Mountain views.

Mr. Rodriguez held a steady job driving a recycling truck for Waste Management Inc.

Sometime in the fall of 2004, Mr. Rodriguez decided he could use some money for debt consolidation. He turned to a company called EquityRelief.com, which promoted itself on the radio and the Internet with slogans such as "Debt relief is stress relief at EquityRelief.com.

"The Denver company already had handled his $70,000 mortgage two years earlier, he says. Still suffering from marginal credit, he enlisted the mortgage broker once again.

Within a matter of weeks, Mr. Rodriguez had secured a new mortgage, for $88,000, from finance company CIT Group. That was enough to settle his outstanding home loan, as well as cover auto debts and a few home repairs.

His income -- about $4,000 a month before taxes -- enabled him to pay the $544.70 initial monthly note, plus living expenses and installments on his credit-card debts.

But with hardly any savings, he had little wiggle room in case something went wrong.

Beyond that, the monthly payment was scheduled to reset after two years, most likely to a higher level -- a common feature of so-called adjustable-rate mortgages, or ARMS.

Mr. Rodriguez's low credit score meant it would have been difficult for him to obtain a prime loan. He says he chose an ARM, with an introductory rate of 6.3%, because that's what the broker offered.

"I just went along with it," he says. "They made it so easy."

At the time, a prime, 30-year fixed-rate mortgage had an interest rate of 5.87%. But the introductory rate on Mr. Rodriguez's ARM would apply for just two years before resetting -- up to a maximum of 12.3%.

Around this time, hundreds of thousands of borrowers, and the lenders who served them, were beginning to make even more optimistic assumptions about their ability to handle subprime debt.

Lenders frequently approved borrowers for loans based only on their credit score and often without verifying income and they effectively ignored the fact that monthly notes would later reset.

The universal, hopeful assumption: With house prices rising, borrowers would be able to refinance before the rate increases hit.

Back in 2004, lenders in the subprime sphere had little reason to worry whether borrowers were getting in over their heads. That's because they often quickly resold some of the loans at a profit.

Wall Street banks snapped them up, packaged them into securities and sold them on to investors.

CIT was no exception.

In 2004, the company, which offers loans for everything from heavy equipment to college tuition, was building its business of originating and selling home mortgages.

Within five months, CIT had sold Mr. Rodriguez's loan along with others to RBS Greenwich Capital, a unit of the Royal Bank of Scotland located in the tiny financial hub of Greenwich.

To obtain such loans, RBS had to outbid other investment banks active in the mortgage market, such as Lehman Brothers Holdings Inc., J.P. Morgan Chase & Co., Deutsche Bank AG and Bear Stearns Cos.

RBS and CIT declined to say how much they profited at various points in the mortgage-securitization process.

Generally speaking, as the loans progress through the chain, buyers and sellers skim a bit from each sale.

Profits from the securities are usually determined by a complex set of factors, including cash flow -- which is affected by timely payments from borrowers like Mr. Rodriguez.

In February 2005, RBS packaged Mr. Rodriguez's loan -- along with 4,853 others -- into a trust called Soundview 2005-1. The trust slices the cash flows from the loans into notes with different levels of risk and return.

Within five days, RBS's sales team had sold $778 million in Soundview 2005-1 notes to investors around the world.

One buyer was Mr. Kelsoe, a senior portfolio manager at the asset-management unit of Morgan Keegan & Co., a Memphis, Tenn., investment firm and unit of Regions Financial Corp.

At the time, Mr. Kelsoe was riding the housing boom by investing heavily in mortgage-backed securities.

"He talked about the importance of identifying and assessing risk," says Wilburn Lane, head of the business school at Lambuth University in Jackson, Tenn. Mr. Kelsoe spoke there in October 2006 to some 300 local businesspeople over a chicken-and-vegetables lunch.

Mr. Kelsoe's big returns, though, depended heavily on the good fortune of borrowers such as Mr. Rodriguez.

Through various of his funds, Mr. Kelsoe invested nearly $8 million in one of the Soundview 2005-1 trust's riskiest pieces. The B-3 tranche, as it was called, offered a return of at least 3.25 percentage points above the London interbank offered rate -- a key short-term rate at which banks lend to each other.

But if borrowers like Mr. Rodriguez began to default on their loans, any losses exceeding 1.25% of the entire loan pool could eat into the value of the B-3 tranche.

In February 2006, at least one borrower in the Soundview 2005-1 trust had a big piece of bad luck.

After pulling into a Waste Management repair facility in the Denver suburb of Commerce City, Mr. Rodriguez detached the trailer from his 18-wheel rig but forgot to set the brake on the tractor.

The tractor rolled across a street and hit a parked pickup truck, causing about $2,000 in damage.

Soon afterward, says Mr. Rodriguez, Waste Management fired him. "They considered that a critical rollaway," he said. Waste Management confirmed that Mr. Rodriguez no longer works for the company, but declined to provide details.

"Ten seconds can change your whole life around," Mr. Rodriguez says a friend remarked to him recently.

Mr. Rodriguez took on odd jobs, working on a paving crew and in a bakery. But his income fell to about $1,800 a month in 2006.

To make matters worse, the monthly note on his mortgage reset to more than $700 in November. He fell behind on the higher payments.

On Feb. 15, 2007, a Denver law firm, acting on behalf of the Soundview trust, began foreclosure proceedings against Mr. Rodriguez and his wife.

The firm cited "failure to pay monthly payments of principal and interest" on an outstanding balance of $85,976.48, Colorado real-estate documents show.

Mr. Rodriguez filed for bankruptcy protection on July 23, a move that extended the time he could remain in his home by several months.

Other borrowers in the Soundview trust also began to default on their loans. By June 2007, defaults had afflicted 3.44% of the loan pool, more than triple the level of a year earlier, according to people familiar with the trust's finances.

About four in 10 loans were at least 30 days in arrears -- all in a period during which the U.S. economy was growing at a healthy pace and unemployment was low.

Because Mr. Kelsoe's investment in the B-3 tranche was so sensitive to losses, its market price plunged.

In fact, as trading in subprime-backed securities dried up amid a broader panic, Mr. Kelsoe, like other investors with subprime holdings, had difficulty figuring out what the investments were worth.

At the end of August, Mr. Kelsoe's Select High Income Fund posted a loss of nearly 28% for the month -- dead last among its peers for the year and for five years as well, according to Morningstar.

Things haven't gone much better for the mortgage units at CIT and RBS -- though they did profit handsomely during the good times. CIT, citing a "problematic outlook" for the business, in July announced plans to shut down its mortgage business and lay off about 550 employees.

A CIT spokeswoman says its mortgage portfolio performed better than peers.

Morale at RBS Greenwich had suffered in recent weeks as employees braced for layoffs. RBS Greenwich recently eliminated 44 of its 1,760 jobs.

Late this summer, Mr. Rodriguez sat on a courthouse bench after his bankruptcy hearing. "I'm under a lot of depression to tell you the truth," he said a day earlier, tears brimming in his eyes.

A worried Mrs. Rodriguez said she feared her husband was suicidal.

Soon afterwards, the couple had vacated their home of 22 years and moved into a low-income apartment in northwest Denver.

***

The American Dialect Society designated the word “subprime” as the 2007 Word of the Year.

The Salad Oil Scandal

In 1963 it was considered the most prodigious swindle of modern times.

The Salad Oil Scandal is a great example of the saying that there is no such thing as a new fraud – only new people committing the same types of fraud.

It was such a basic premise – saying you had something when in fact you didn’t have it.

What such examples provide are opportunities to retrofit circumstances to what could be happening within our own organisations – a “but for the Grace of God” examination before it is too late.

It is also timely to look back on past events to see if we, as a risk focused society, have learnt the lessons of past fraudulent and competency indiscretions.

Never has this been more important than on the day that the United States government seized control of Fannie Mae and Freddie Mac in its most dramatic market intervention in decades.

***

The Salad Oil Scandal, also referred to as the "Soybean Scandal," was a major corporate scandal in 1963 that ultimately caused over $150 million in losses to corporations including American Express, Bank of America and Bank Leumi, as well as many international trading companies.

The scandal's ability to push otherwise cautious and conservative lenders into increasingly risky practices has prompted some comparisons to recent financial crises including the 2007 subprime mortgage financial crisis.

The scandal involved the company Allied Crude Vegetable Oil in New Jersey, led by Tino De Angelis, which discovered that it could obtain loans based upon the inventory of its salad oil.

Ships apparently full of salad oil would arrive at the docks, and inspectors would confirm that the ships were indeed full of oil, allowing the company to obtain millions in loans.

In reality, the ships were mostly filled with water, with a only a few feet of salad oil on top.

Since the oil floated on top of the water, it appeared to inspectors that these ships were loaded with oil. The company even transferred oil between different tanks while entertaining the inspectors at lunch.

Once the scandal was exposed, American Express was one of the biggest casualties. Its stock dropped more than 50% as a result of the scandal, which cost the company nearly $58 million.

***

The son of poor Italian immigrants, De Angelis was forced to quit high school to support his parents.

Starting out as a meat cutter in The Bronx, he devised a method for speedily dismembering hogs by slicing them up on a moving assembly line. That helped him get a $10,000 loan to open his own pork-packing plant. While still in his 20s, he built it into the largest such operation in the Eastern U.S. and sold copious quantities of meat to the federal school-lunch program.

De Angelis wisely saw that a shrewd operator could make a fortune out of two other Government programs: farm price supports and foreign aid.

His idea: buy up the bulging soybean surplus, turn it into soybean oil, which is used for everything from salad dressing to paint, and ship the oil abroad—either privately or through the many Government aid programs.

Between 1958 and 1962, De Angelis built a sprawling refinery in Bayonne and leased 139 oil storage tanks, many as tall as five-story buildings.

Operating in a slippery, fiercely competitive industry, he outdid other companies by buying the most modern equipment, paying the highest wages and putting in the lowest bids for Government export contracts.

By 1962, he accounted for three-quarters of the nation's exports of soybean and cottonseed oils, shipping 361 million lbs.

All this required considerable capital—and that is how the swindle began.

***

To finance his rapid growth, Tino borrowed huge sums of money, using huge amounts of oil as collateral.

But there was one hitch: he never had all that oil.

What he did have was a mountain of paper—certificates attesting that he owned the oil.

Although there was a similar incident at that very time was making headlines for having passed off similarly spurious paper for nonexistent ammonia tanks, the bankers and brokers never bothered to check up on De Angelis' tanks.

Nor did they question De Angelis' warehouse receipts, because Tino had them signed by officials of American Express Co.

In a sense, American Express got mixed up with Tino in an effort to spur sales of its famous travelers' checks.

Back in 1944, the company figured that it could induce bankers to push the checks by performing a service for them.

A subsidiary, American Express Warehousing, would store, inspect and vouch for the oil that commodities dealers commonly used as collateral for their bank loans. It was a rewarding business—De Angelis paid American Express Warehousing up to $20,000 a week—but terribly risky.

If anything went wrong, Amexco's subsidiary was responsible for making good on its warehouse certificates.

De Angelis' men duped Amexco with surprising ease.

Often, one of them would clamber to the top of a tank, drop in a weighted tape measure, then shout down to an Amexco inspector on the ground that the tank was 90% full.

Sometimes the tanks were indeed full—with water, topped by a thin slick of oil.

Usually many were empty. Moreover, the tanks were connected by a jungle of pipes; Tino's men sometimes sneaked into the casually guarded tank farm on weekends, pumped oil from one tank to another.

These machinations gave him an endless supply of oil certificates—and endless borrowing power.

At one time he had loans out on three times as much oil as the Bayonne tanks could hold.

But Tino figured—rightly—that his various and hotly competitive creditors would never get together and compare their overlapping certificates.

****

The inspectors were eventually tipped off by such things as attempted bribery and delivery mistakes. So they returned to Allied's tanks in Bayonne and found the water.

The result was a massive crash of the futures market, wiping out in minutes the entire value of the loans.

On November 19, 1963, De Angelis's company filed for bankruptcy, at which point investors learned hundreds of millions were unaccounted for.

The brokerages who handled De Angelis's futures trades were now tainted, and the next day the New York Stock Exchange, worried about potential U.S. Securities and Exchange Commission involvement, suspended Williston and Beane and Ira Haupt and Co. from trading.

Word started spreading as traders investigated the suspension, and desperately tried to get their holdings out of the companies.

The entire debacle was overshadowed by the assassination of U.S. President John F. Kennedy on November 22, 1963.

Hours before Kennedy was shot, New York Stock Exchange president G. Keith Funston was attempting to avoid a massive crash caused by the 20,700 customers of Ira Haupt, who feared their holdings were now worthless.

Because of the trading the brokerage firm did on De Angelis' behalf, they owed various banks over $37,000,000 that it could not pay.

The Kennedy assassination provided the panic that Funston was trying to avoid. In 27 minutes, the Dow dropped 24 points (about 5%) and 2.6 million shares were sold off; the exchange closed 83 minutes early that day.

Based on the Time Magazine Article – The Man Who Fooled Everyone – Friday 4th June 1965

The 1960 Presidential Debates

They focused on what they saw, not what they heard

It is now generally accepted folklore that the first 1960 presidential debate between Richard Nixon and John Kennedy was a turning point in the evolution of American television.

It can also be seen as a turning point in the importance of a well prepared communication strategy when one is seeking to impress their fortunes on a constituency.

As long as a bow as it may be (tipping my hat to you here Angus), an interested spectator of Internal Audit can also draw parallels and … nearly 48 years on … use the 1960 Presidential Debates as inspiration for a new approach in the way that Internal Audit communicates with her many stakeholders.

***

On 26 September 1960, 70 million U.S. viewers tuned in to watch Senator John Kennedy of Massachusetts and Vice President Richard Nixon in the first-ever televised presidential debate.

It was the first of four televised "Great Debates" between Kennedy and Nixon.

The Great Debates marked television's grand entrance into presidential politics.

They afforded the first real opportunity for voters to see their candidates in competition, and the visual contrast was dramatic.

In August, Nixon had seriously injured his knee and spent two weeks in the hospital. By the time of the first debate he was still twenty pounds underweight, his pallor still poor.

He arrived at the debate in an ill-fitting shirt, and refused make-up to improve his color and lighten his perpetual "5:00 o'clock shadow."

Kennedy, by contrast, had spent early September campaigning in California. He was tan and confident and well-rested.

"I had never seen him looking so fit," Nixon later wrote.

In substance, the candidates were much more evenly matched.

Indeed, those who heard the first debate on the radio pronounced Nixon the winner.

But the 70 million who watched television saw a candidate still sickly and obviously discomforted by Kennedy's smooth delivery and charisma.

Those television viewers focused on what they saw, not what they heard.

Studies of the audience indicated that, among television viewers, Kennedy was perceived the winner of the first debate by a very large margin.

Perhaps as no other single event, the Great Debates forced society to ponder the role of television in democratic life.

***

Researching for this post inspired the author to think about the way that my chosen profession – Internal Audit – seeks to influence her stakeholders.

Are we Richard Nixon assuming that verbal and content substance will always win out over form or are we John Kennedy that – through force of content and visual presentation – wins over the stakeholders.

Taking this further have the days of presenting our reports in a written format (sometimes sent via email / sometimes sent in hard copy) gone the way of Richard Nixon’s political fortunes?

What is the alternative?

I can envisage the day when our “reports” are presented visually in a control (excuse the pun) room where all the controls that we have reviewed are visually displayed.

Where there is a failing in the control the visual demonstration shows the ramifications arising therefrom throughout the totality of the organisation’s control environment.

Therein lies the challenge for all of us interested in advancing the profession and practice of internal auditing.

Why should Internal Audit change from what we have got?

To quote President Kennedy, nearly two years on from the Great Debates, in describing the United States’ quest for the moon:

Many years ago the great British explorer George Mallory, who was to die on Mount Everest, was asked why did he want to climb it.

He said, "Because it is there."

Well, space is there, and we're going to climb it, and the moon and the planets are there, and new hopes for knowledge and peace are there.

And, therefore, as we set sail we ask God's blessing on the most hazardous and dangerous and greatest adventure on which man has ever embarked.

***

In other words, why not!

Losing Weight - The Story of the Kilogram

In the 18th century, hundreds of thousands of different weights and measures were in use

The story of the kilogram has interesting ramifications for our concept of measurement to define performance or non performance.

A strong internal control system is one where it is possible to monitor and assess the quality of the system’s performance over time.

What happens to our concept of the measurement of performance, however, when the cornerstone of measurement – the kilogram – isn’t what it should be.

***

Forty feet underground, secured in a temperature- and humidity-controlled vault here, lies Kilogram No. 20.

It’s an espresso-shot-sized, platinum-iridium cylinder that is the perfect embodiment of the kilogram – almost perfect.

In the 120 years since No. 20 and several dozen other exact copies were crafted in France to serve as the world’s standards of the kilogram, they have been mysteriously drifting apart.

The difference is on average about 50 micrograms – the weight of a grain of fine salt.

But the ramifications have rippled through the world of precision physics.

***

In essence, no one really knows today what a kilogram is.

The kilogram is the last of seven base units in the International System of Units that is still based on a physical object

In the 18th century, hundreds of thousands of different weights and measures were in use around the world.

The French alone employed about 250,000 different units of measure.

The Enlightenment and French Revolution in late 18th century spurred the idea of standardization.

People could only be free if they could calculate for themselves the weight and cost of things they bought, philosophers reasoned.

The French government created the kilogram in 1795, defining it as the mass of a liter of distilled water at the temperature of melting ice.

A century later, the Treaty of the Meter established the kilogram as an international standard.

The foundation of the standard was a cylindrical ingot of 90% platinum and 10% iridium created in 1878 that became known as Le Grand K, or more officially the International Prototype.

Forty copies were made and distributed to governments around the world. Another 50 were made later.

These 90 copies serve as national standards, used to calibrate working weights in science and industry.

About every 50 years, the national prototypes are returned to the headquarters of the International Bureau of Weights and Measures in Sevres, France, to be compared with the International Prototype.

During the first major comparison about 1950, scientists noticed discrepancies between the average masses of Le Grand K and its copies. They were concerned, but could not discern a trend.

Science was already grappling with inconsistencies in other units and was trying to replace the pieces of metal and other artifacts that delineated the old world.

The meter, for example, was changed in 1960 from two scratches on a platinum-iridium bar to a certain number of wavelengths of light emitted from a particular kind of krypton. In 1983, it was changed again to the distance traveled by light in a specific fraction of a second.

At the last major kilogram comparison about 1990, some of the copies had gained as much as 132 micrograms. A few had lost up to 665 micrograms.

No. 20 was 18 micrograms heavier.

There was no way to tell what was changing: Le Grand K or its copies.

Perhaps the platinum in the cylinders was sopping up mercury from the atmosphere. Maybe dissolved gas was escaping from the cylinders. One idea was that cleaning the cylinders with distilled water and ether had altered their weights.

***

Two ideas have emerged as the leading contenders to redefine the kilogram.

One involves counting the trillion trillion atoms in the most perfect silicon sphere ever made.

The other attempts to measure the electrical current necessary to balance a one kilogram weight against Earth’s gravity.

After decades of work, both efforts have so far produced stunningly precise measurements – but still too inconsistently to prove the accuracy of their methods.

(Thanks to Cheryl for the idea behind this post)