The Santa Claus Controversy

There is a stream of questions Santa has yet to answer

Data protection laws lay down strict conditions for the use of personal data and there is no evidence that Santa Claus has an adequate compliance programme in place.

Children across the world who write letters to Claus with a list of gift requests are not told for how long that data is kept, or if it will be used for other purposes such as marketing by third parties.

Relevant legislation stipulates that data should not be kept for longer than necessary, which would mean 25th December, though Claus may argue that he needs to keep the letters for six years to use in any gift-related lawsuits.

"There is a stream of questions Santa has yet to answer," said William Malcolm, a data protection specialist at Pinsent Masons.

"Is this information used for anything other than present giving? Information passes out of the home jurisdiction, so does Santa check the letters for unambiguous, specific and informed consent to this overseas transfer?"

The legislation says that you must inform someone when you are collecting data about them, and tell them what the purpose of collection is.

"What about the naughty/nice database?" said Malcolm.

"Are children given notice that behavioural data is being collected about them throughout the year? And does it qualify as covert monitoring, which would breach Article 8 of the European Convention on Human Rights?"

People can make a subject access request of databases holding their personal information, but the database operator has 40 days in which to respond.

Children are now too late, therefore, to find out before Christmas if they are on the naughty or nice section of the system.

"Additionally, anyone taking orders in the post as Santa does has certain obligations," said Struan Robertson, e-commerce specialist at Pinsent Masons.

"Children have a right to reject the gifts they requested and receive a full refund within seven working days. If he does not provide lots of information about the child's purchase when making his delivery then that period can be extended by up to three months," said Robertson.

"All they have to do is cancel their contract, and I imagine a follow-up letter up the chimney should do it. He must also tell children that they have this right, which he plainly doesn't," he said.

Under the regulations, Claus is obliged to provide children with details of the price of the goods delivered, something which is to most people not in the spirit of Christmas.

For the laws to apply there must be a contract in place, but Robertson said that this was almost always the case.

"The letter up the chimney is clearly an offer, the delivery of the goods is acceptance. Under common law there also must be a form of consideration, which the glass of brandy and carrot clearly qualify as," he said.

Claus is likely to be in breach of one company's trade mark with his gift distribution enterprise. 'Santa Claus of Greenland' has a trade mark over that term in relation to games, playthings, sports goods, decorations for Christmas trees and the regulation and control of electricity, amongst other things.

"This is a clear case of infringement," said David Woods, a litigation specialist at Pinsent Masons.

"True, Santa is from Lapland not Greenland, but I think that you could make the case that the level of general ignorance of geography is such that confusion would be created by Santa's trading under the name Santa Claus."

**

Honestly Lay Bare wishes all her readers a happy and safe Christmas.

We will be back on board in mid January.

How the Thundering Herd Faltered

We have got the right people in place as well as good risk management and controls

E. Stanley O'Neal

Chief Executive Officer, Merrill Lynch

2005

In January 2008, had Honestly Lay Bare said that by year's end - through poor risk management and deficient internal controls - Lehman Brothers would no longer exist; Citi, AIG, Freddie and Fannie (not to mention Northern Rock, the country of Iceland etc) were to be recipients of government welfare and that Merrill Lynch would be taken over by the Bank of America there would be few amongst you that would not question our sanity.

Well ... in 2008 ...

This brings us to the penultimate Honestly Lay Bare for 2008.

It brings us to the ignominious end to America's most famous brokerage house.

This is the story of how Merril Lynch faltered and fell.

**

There were high-fives all around Merril Lynch headquarters in Lower Manhattan as 2006 drew to a close. The firm’s performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year.

And Merrill’s decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages.

The deal would provide Merrill with even more loans for one of its lucrative assembly lines, an operation that bundled and repackaged mortgages so they could be resold to other investors.

It was a moment to savor for E. Stanley O’Neal, Merrill’s autocratic leader, and a group of trusted lieutenants who had helped orchestrate the firm’s profitable but belated mortgage push.

Two indispensable members of Mr. O’Neal’s clique were Osman Semerci, who, among other things, ran Merrill’s bond unit, and Ahmass L. Fakahany, the firm’s vice chairman and chief administrative officer.

A native of Turkey who began his career trading stocks in Istanbul, Mr. Semerci, 41, oversaw Merrill’s mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking.

At the same time, Mr. Fakahany, 50, an Egyptian-born former Exxon executive who oversaw risk management at Merrill, kept the machinery humming along by loosening internal controls, according to the former executives.

Mr. Semerci’s and Mr. Fakahany’s actions ultimately left their firm vulnerable to the increasingly risky business of manufacturing and selling mortgage securities, say former executives, who requested anonymity to avoid alienating colleagues at Merrill.

To make matters worse, Merrill sped up its hunt for mortgage riches by embracing and trafficking in complex and lightly regulated contracts tied to mortgages and other debt. And Merrill’s often inscrutable financial dance was emblematic of the outsize hazards that Wall Street courted.

While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives — like those that Merrill used — transformed a financial brush fire into a conflagration.

As subprime lenders began toppling after record waves of homeowners defaulted on their mortgages, Merrill was left with $71 billion of eroding mortgage exotica on its books and billions in losses.

On Sept. 15 this year — less than two years after posting a record-breaking performance for 2006 and following a weekend that saw the collapse of a storied investment bank, Lehman Brothers, and a huge federal bailout of the insurance giant American International Group — Merrill was forced into a merger with Bank of America.

It was an ignominious end to America’s most famous brokerage house, whose ubiquitous corporate logo was a hard-charging bull.

Typical of those who dealt in Wall Street’s dizzying and opaque financial arrangements, Merrill ended up getting burned, former executives say, by inadequately assessing the risks it took with newfangled financial products — an error compounded when it held on to the products far too long.

The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).

Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.

Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.

The synthetic C.D.O. grew out of a structure that an elite team of J.P. Morgan bankers invented in 1997. Their goal was to reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M., General Electric and Procter & Gamble.

Regular C.D.O.’s contain hundreds or thousands of actual loans or bonds. Synthetics, on the other hand, replace those physical bonds with a computer-generated group of credit-default swaps. Synthetics could be slapped together faster, and they generated fatter fees than regular C.D.O.’s, making them especially attractive to Wall Street.

The bankers who invented the synthetics for J. P. Morgan say they kept only the highest-quality and most bulletproof portions of their product in-house, known as the super senior slice. They quickly sold anything riskier to firms that were willing to take on the dangers of ownership in exchange for fatter fees.

“In 1997 and 1998, when we invented super senior risk, we spent a lot of time examining how much is too much to have on our books,” said Blythe Masters, who was on the small team that invented the synthetic C.D.O. and is now head of commodities at JPMorgan Chase. “We would warehouse risk for a period of time, but we were always focused on developing a market for whatever we did. The idea was we were financial intermediaries. We weren’t in the investment business.”

For years, the product that Ms. Masters and her colleagues invented remained just a mechanism for offloading risk in high-grade corporate lending. But as often occurs with Wall Street alchemy, a good idea started to be misused — and a product initially devised to insulate against risk soon morphed into a device that actually concentrated dangers.

This shift began in 2002, when low interest rates pushed investors to seek higher returns.

“Investors said, ‘I don’t want to be in equities anymore and I’m not getting any return in my bond positions,’ ” said William T. Winters, co-chief executive of JPMorgan’s investment bank and a colleague of Ms. Masters on the team that invented the first synthetic. “Two things happened. They took more and more leverage, and they reached for riskier asset classes. Give me yield, give me leverage, give me return.”

A few years ago, of course, some of the biggest returns were being harvested in the riskier reaches of the mortgage market. As C.D.O.’s and other forms of bundled mortgages were pooled nationwide, banks, investors and rating agencies all claimed that the risk of owning such packages was softened because of the broad diversity of loans in each pool.

In other words, a few lemons couldn’t drag down the value of the whole package.

But the risk was beneath the surface. By 2005, with the home lending mania in full swing, the amount of C.D.O.’s holding opaque and risky mortgage assets far exceeded C.D.O.’s composed of blue-chip corporate loans. And inside even more abstract synthetic C.D.O.’s, the risk was harder to parse and much easier to overlook.

By 2005, Merrill was in a full-on race to become the biggest mortgage player on Wall Street. A latecomer to the arena, it especially envied Lehman Brothers for the lush mortgage profits that it was already hauling in, former Merrill executives say.

Lehman had also built a mortgage assembly line that Merrill wanted to emulate. Lehman made money every step of the way: by originating mortgage loans, administering the paperwork surrounding them, and packaging them into C.D.O.’s that could be sold to investors.

Eager to build its own money machine, Merrill went on a buying spree. From January 2005 to January 2007, it made 12 major purchases of residential or commercial mortgage-related companies or assets. It bought commercial properties in South Korea, Germany and Britain, a loan servicing operation in Italy and a mortgage lender in Britain. The biggest acquisition was First Franklin, a domestic subprime lender.

The firm’s goal, according to people who met with Merrill executives about possible deals, was to generate in-house mortgages that it could package into C.D.O.’s. This allowed Merrill to avoid relying entirely on other companies for mortgages.

That approach seemed to be common sense, but it was never clear how well Merrill’s management understood the risks in the mortgage business.

Former executives say Mr. Fakahany had weakened Merrill’s risk management unit by removing longstanding employees who “walked the floor,” talking with traders and other workers to figure out what kinds of risks the firm was taking on.

Former Merrill executives say that the people chosen to replace those employees were loyal to Mr. O’Neal and his top lieutenants. That made them more concerned about achieving their superiors’ profit goals, they say, than about monitoring the firm’s risks.

A pivotal figure in the mortgage push was Mr. Semerci, a details-oriented manager whom some former employees described as intimidating. He joined Merrill in 1992 as a financial consultant in Geneva.

After that, he became a fixed-income sales representative for the firm’s London unit. He later rose quickly through Merrill’s ranks, ultimately overseeing a broad division: fixed income, currencies and commodities.

Always carrying a notebook with his operations’ daily profit-and-loss statements, Mr. Semerci would chastise traders and other moneymakers who told risk management officials exactly what they were doing, a former senior Merrill executive said.

“There was no dissent,” said the former executive, who requested anonymity to maintain relationships on Wall Street. “So information never really traveled.”

Beyond assembling its own mortgage machine and failing to police risks so it could book fatter profits, Merrill also dove into the C.D.O. market — primarily synthetics.

Unlike the C.D.O. pioneers at J. P. Morgan who saw themselves as financial designers and intermediaries wary of the dangers of holding on to their products too long, Merrill seemed unafraid to stockpile C.D.O.’s to reap more fees.

Although Merrill had a scant presence in the C.D.O. market in 2002, four years later it was the world’s biggest underwriter of the products.

The risk in Merrill’s business model became viral after A.I.G. stopped insuring the highest-quality portions of the firm’s C.D.O.’s against default.

For years, Merrill had paid A.I.G. to insure its C.D.O. stakes to limit potential damage from defaults. But at the end of 2005, A.I.G. suddenly said it had had enough, citing concerns about overly aggressive home lending. Merrill couldn’t find an adequate replacement to insure itself.

Rather than slow down, however, Merrill’s C.D.O. factory continued to hum and the firm’s unhedged mortgage bets grew, its filings show.

The number of mortgage-related C.D.O.’s being produced across Wall Street was staggering, and all of that activity represented a gamble that mortgages underwritten during the most manic lending boom ever would pay off.

In 2005, firms issued $178 billion in mortgage and other asset-backed C.D.O.’s, compared with just $4 billion worth of C.D.O.’s that used safer, high-grade corporate bonds as collateral. In 2006, issuance of mortgage and asset-backed C.D.O.’s totaled $316 billion, versus $40 billion backed by corporate bonds.

Firms underwriting the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold. So the fees generated on the $316 billion worth of mortgage- and asset-backed C.D.O.’s issued in 2006 alone, for example, would have been about $1.3 billion to $8 billion.

Merrill, the biggest player in the C.D.O. game, appeared to be a cash register. After its banner year in 2006, it produced another earnings record in the first quarter of 2007, finally beating three rivals, Lehman, Goldman Sachs and Bear Stearns, in profit growth.

But as 2007 progressed, the mortgage business began to fall apart — and the impact was brutal. As mortgages started to fail, the debt ratings on C.D.O.’s were cut; anyone left holding the products was locked in a downward spiral because no one wanted to buy something that was collapsing. Among the biggest victims was Merrill.

In October 2007, the firm shocked investors when it announced a $7.9 billion write-down related to its exposure to mortgage C.D.O.’s, resulting in a $2.3 billion loss, the largest in the firm’s history. Mr. Semerci was forced out, later landing at a London-based hedge fund, the Duet Group.

Merrill’s board also ousted Mr. O’Neal. On top of the $70 million in compensation he was awarded during his four-year tenure as chief executive, Mr. O’Neal departed with an exit package worth $161 million.

John Thain a former Goldman Sachs executive who was also head of the New York Stock Exchange, was hired as Merrill’s chief executive to try to clean up Mr. O’Neal’s mess. But multibillion-dollar losses kept piling up, and Merrill was hard pressed to raise enough to replenish its coffers.

“None of the trading businesses should be taking risks, either single positions or single trades, that wipe out the entire year’s earnings of their own business,” Mr. Thain said in January. “And they certainly shouldn’t take a risk to wipe out the earnings of the entire firm.”

A month later, Mr. Fakahany left Merrill. Upon his departure, in a statement that Merrill issued, he said: “I leave knowing that the firm’s financial condition is significantly enhanced and the new team is in place and moving forward.”

Mr. Fakahany continued to receive a Merrill salary until the end of this summer; he does not appear to have received an exit package.

Mr. Thain, meanwhile, sold off assets for whatever price he could get to try to salvage the firm. In August, he arranged a sale of $31 billion of Merrill’s C.D.O.’s to an investment firm for 22 cents on the dollar. For the first nine months of this year, Merrill recorded net losses of $14.7 billion on its C.D.O.’s. Through October, some $260 billion of asset-backed C.D.O.’s have started to default.

As the depth of Merrill’s problems emerged, its shares plummeted. With Lehman on the verge of collapse, Wall Street began to wonder if Merrill would be next.

Some banks were so concerned that they considered stopping trading with Merrill if Lehman went under, according to participants in the Federal Reserve’s weekend meetings on Sept. 13 and 14.

The following Monday, Merrill — torn apart by its C.D.O. venture — was taken over by Bank of America.

**

2008 will be remembered as the year in risk management and internal controls when we finally relinquished Enron as the case study of choice.

2008 delivered - and 2009 promises - so many more case studies that it is difficult to imagine a time like the one that we are currently living through.

Ultimately the case studies have a common theme - poor risk management and deficient internal controls.

Could there be a better validation therefore of the need for increased investment by companies in those very skill sets (and in skill sets of those that are confident enough to challenge general wisdom).

The only down side that Honestly Lay Bare can see is that it may be starved - years into the future - of material for its case studies.

This is a risk we are willing to take.

(Post based in part on How the Thundering Herd Faltered and Fell by Gretchen Morgenson - New York Times - November 9, 2008)

The Whistleblower

A dream project of unparalleled importance to the Nation but in reality a great loot of public money because of very poor implementation

The term whistleblower derives from the practice of English bobbies, who would blow their whistles when they noticed the commission of a crime. The whistle would alert both law enforcement officers and the general public of danger.

The term ‘whistleblower’ has several meanings, but is usually used to refer to someone who alerts the authorities to misconduct from within an organisation.

**

Today we will explore the ultimately tragic story of one such whistleblower.

Honestly Lay Bare asks many questions of its readers – one that it cannot answer is would it be prepared to go as far as Satyendra Dubey

**

Satyendra Dubey, was born in 1973 at the village of Shahpur in Bihar, India. The family of five girls and two boys subsisted on a small piece of land.

Until the age of 15 he studied at the Gang Baksh Kanodiya High School Shahpur and joined junior college at Allahabad, about three hundred kilometers away.

Upon graduation from university he for some time, Dubey worked at the Ministry of Surface Transport in Delhi, before he was selected for the Indian Engineering Service, India's top engineering bureaucracy.

In July 2002 he was employed by the National Highway Authority of India (NHAI).

Dubey became the Assistant Project Manager at Koderma, Jharkhand, responsible for managing a part of the Aurangabad-Barachatti section of National Highway 1. This highway was part of the Golden Quadrilateral (GQ) Corridor Project, launched by the then Prime Minister Atal Bihari Vajpayee, which aimed to connect the metros of the country by four-lane limited-access highways totalling 14,000 km, at an overall cost more than USD 10 billion.

During this period, he got the contractor of the project to suspend three of his engineers after exposing serious financial irregularities. At one point, he had the contractor rebuild six kilometers of under-quality road

The GQ project had strict controls to ensure that the construction work would be carried on by experienced firms with proper systems. A second independent contract was given for supervision of the project. However, Dubey discovered that the contracted firm, Larsen and Toubro, had been quietly subcontracting the actual work to smaller low-technology groups, controlled by the local mafia.

When he wrote to his boss, NHAI Project Director SK Soni, and to Brig Satish Kapoor, engineer overlooking the supervision, there was no action.

In August 2003 when he was transferred to Gaya, a transfer which he opposed since he felt that it did not serve the interests of NHAI.

At Gaya, he exposed large-scale flouting of NHAI rules regarding sub-contracting and quality control. At this time he took a departmental test and was promoted as deputy general manager, which made him eligible to take charge as project director.

Meanwhile, faced with the possibility of high-level corruption within the NHAI, Dubey wrote directly to Prime Minister Atal Bihari Vajpayee, detailing the financial and contractual irregularities in the project.

While the letter was not signed, he attached a separate bio-data so that the matter would be taken more seriously. Despite a direct request that his identity be kept secret and its sensitive content that pointed fingers at some of his superiors, the letter along with bio-data was forwarded immediately to the Ministry for Road Transport. Dubey also sent the same letter to the Chairman, NHAI.

Soon Dubey received a reprimand: the vigilance office of NHAI officially "cautioned" Dubey for the impropriety of writing a letter directly to the Prime Minister. In the process, through connections in the NHAI and the Ministry, it is likely that the letter may have reached the criminal nexus running the highway construction projects in Bihar.

The letter said the NHAI officials showed a great hurry in giving mobilisation advance to selected contractors for financial consideration. "In some cases the contractors have been given mobilisation advance just a day after signing the contract agreement."

"The entire mobilisation advance of 10 per cent of contract value, which goes up to Rs 40 crore (USD 10 million) in certain cases, are paid to contractors within a few weeks of award of work but there is little follow up to ensure that they are actually mobilised at the site with the same pace, and the result is that the advance remains lying with contractors or gets diverted to their other activities," it said.

Dubey also highlighted the problems of sub-contracting by the primary contractors like Larsen and Toubro.

"Though the NHAI is going for international competitive bidding to procure the most competent civil contractors for execution of its projects, when it comes to actual execution, it is found that most of the works, sometimes even up to 100 per cent are subcontracted to petty contractors incapable of executing such big projects," he said. “Everyone in the NHAI is aware of the phenomenon of subcontracting but looked the other way.”

"A dream project of unparalleled importance to the Nation but in reality a great loot of public money because of very poor implementation at every state." wrote Dubey.

**

On November 27, 2003, Dubey was returning from a wedding and called his driver to meet him at the station. He reached Gaya railway station at three in the morning, and found that his car was not able to come because of a battery malfunction.

It appears that at this point Dubey decided to take a rickshaw home. When he didn’t reach home, his driver went to look for him and found him dead by the side of the road in the suburb of A.P. Colony.

He had been shot.

Dubey had paid the ultimate price for his whistleblowing.

10,000 Hours

You don't get benefits from mechanical repetition, but by adjusting your execution over and over to get closer to your goal

The popular social observer – Malcolm Gladwell – has recently released a new book called Outliers in which he analyses those amongst us that are at the outer boundaries of our profession / calling.

Those for whom there is little equal.

Those that are experts.

**

His writings are based on a 1994 New York Times article which in itself was based on a number of studies undertaken in the early 1990s and which still have relevance today.

Honestly Lay Bare has taken an interest in this work because it has a theory (as yet untested by anyone!) – the higher the number of experts involved in a discussion the greater the likelihood that all considerations will be afforded to the situation.

This wide ranging assessment (a risk assessment?) gives rise to a environment whereby strong practices of internal control and corporate governance are likely to foster.

Note – we don’t hold necessarily true that such an environment WILL eventuate. Rather that the best possible circumstances have been conceived for the environment to be nutured.

Back, however, to the study of experts.

**

Studies of chess masters, virtuoso musicians and star athletes show that the relentless training routines of those at the top allows them to break through ordinary limits in memory and physiology, and so perform at levels that had been thought impossible.

Perhaps the most surprising data show that extensive practice can break through barriers in mental capacities, particularly short-term memory. In short-term memory, information is stored for the few seconds that it is used and then fades, as in hearing a phone number which one forgets as soon as it is dialed.

The standard view, repeated in almost every psychology textbook, is that the ordinary limit on short-term memory is for seven or so bits of information -- the length of a phone number. More than that typically cannot be retained in short-term memory with reliability unless the separate units are "chunked," as when the numbers in a telephone prefix are remembered as a single unit.

But, in a stunning demonstration of the power of sheer practice to break barriers in the mind's ability to handle information, Dr. Ericsson and associates at Carnegie-Mellon University have taught college students to listen to a list of as many as 102 random digits and then recite it correctly. After 50 hours of practice with differing sets of random digits, four students were able to remember up to 20 digits after a single hearing. One student, a business major not especially talented in mathematics, was able to remember 102 digits. The feat took him more than 400 hours of practice.

Through their hours of practice, elite performers of all kinds master shortcuts that give them an edge. Dr. Bruce Abernathy, a researcher at the University of Queensland in Australia, has found that the most experienced players in racquet sports like squash and tennis are able to predict where a serve will land by cues in the server's posture before the ball is hit.

A 1992 study of baseball greats like Hank Aaron and Rod Carew by Thomas Hanson, then a graduate student at the University of Virginia in Charlottesville, found that the all-time best hitters typically started preparing for games by studying films of the pitchers they would face, to spot cues that would tip off what pitch was about to be thrown. Using such fleeting cues demands rehearsing so well that the response to them is automatic, cognitive scientists have found.

The maxim that practice makes perfect has been borne out through research on the training of star athletes and artists. Dr. Anthony Kalinowski, a researcher at the University of Chicago, found that swimmers who achieved the level of national champion started their training at an average age of 10, while those who were good enough to make the United States Olympic teams started on average at 7. This is the same age difference found for national and international chess champions in a 1987 study.

Similarly, the best violinists of the 20th century, all with international careers as soloists for more than 30 years, were found to have begun practicing their instrument at an average age of 5, while violinists of only national prominence, those affiliated with the top music academy in Berlin, started at 8, Dr. Ericsson found in research reported last year in The Psychological Review.

Because of limits on physical endurance and mental alertness, world-class competitors -- whether violinists or weight lifters -- typically seem to practice arduously no more than four hours a day, Dr. Ericsson has found from studying a wide variety of training regimens.

"When we train Olympic weight lifters, we find we often have to throttle back the total time they work out," said Dr. Mahoney. "Otherwise you find a tremendous drop in mood, and a jump in irritability, fatigue and apathy."

Because their intense practice regimen puts them at risk for burnout or strain injuries, most elite competitors also make rest part of their training routine, sleeping a full eight hours and often napping a half-hour a day, Dr. Ericsson found.

Effective practice focuses not just on the key skills involved, but also systematically stretches the person's limits. "You have to tweak the system by pushing, allowing for more errors at first as you increase your limits," said Dr. Ericsson. "You don't get benefits from mechanical repetition, but by adjusting your execution over and over to get closer to your goal."

Violin virtuosos illustrate the importance of starting early in life. In his 1993 study Dr. Ericsson found that by age 20 top-level violinists in music academies had practiced a lifetime total of about 10,000 hours, while those who were slightly less accomplished had practiced an average of about 7,500 hours.

A study of Chinese Olympic divers, done by Dr. John Shea of Florida State University, found that some 11-year-old divers had spent as many hours in training as had 21-year-old American divers. The Chinese divers started training at age 4.

"It can take 10 years of extensive practice to excel in anything," said Dr. Simon. "Mozart was 4 when he started composing, but his world-class music started when he was about 17."

Total hours of practice may be more important than time spent in competition, according to findings published by Dr. Neil Charness, a colleague of Dr. Ericsson at Florida State University. Dr. Charness, comparing the rankings of 107 competitors in the 1993 Berlin City Tournament, found that the more time they spent practicing alone, the higher their ranking as chess players. But there was no relationship between the chess players' rankings and the time they spent playing others.

The most contentious claim made by Dr. Ericsson is that practice alone, not natural talent, makes for a record-breaking performance. "Innate capacities have very little to do with becoming a champion," said his colleague, Dr. Charness. "What's key is motivation and temperament, not a skill specific to performance. It's unlikely you can get just any child to apply themselves this rigorously for so long."

But many psychologists argue that the emphasis on practice alone ignores the place of talent in superb performance. "You can't assume that random people who practice a lot will rise to the top," said Dr. Howard Gardner, a psychologist at Harvard University. Dr. Ericsson's theories "leave out the question of who selects themselves -- or are selected -- for intensive training," adding, "It also leaves out what we most value in star performance, like innovative genius in a chess player or emotional expressiveness in a concert musician."

Dr. Gardner said: "I taught piano for many years, and there's an enormous difference between those who practice dutifully and get a little better every week, and those students who break away from the pack. There's plenty of room for innate talent to make a difference over and above practice time. Mozart was not like you and me."

**

So 10,000 hours of practice will make you an expert and will help fill in the gaps in the Honestly Lay Bare theory.

Before you start though – it is worthy of noting that if you worked an eight hour day and took your four weeks annual leave a year it would take you 5 years before you can consider yourself an expert.

And that is just practice – you would still have to find time over and above that to do your work!

How Ninjas Destroyed Risk Management

In Affectionate Remembrance of Risk Management which died at 1885 Lundy Avenue, San Jose.

Deeply lamented by a large circle of sorrowing friends and acquantances.

Whenever there is a major earthquake, there is a rush to find its epicentre.

Whenever there is a suspected arson, the authorities seek out the seat of the fire.

Where then was the heart of what is considered the worst financial situation in nearly 80 years?

Where was its epicentre? Where was the seat of the crisis?

Honestly Lay Bare submits to its learned readers that it is Suite #100, 1885 Lundy Avenue, San Jose, California.

How is it that Honestly Lay Bare - not known for its geographical preciseness - can be so precise on this?

What is it that makes 1885 Lundy Avenue - near the corner of Commerce Drive and just down from Fortune Drive - San Jose so special?


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It is the head office of HCL Finance, Inc.

HCL Finance, Inc. was founded in 1983 .

It specializes in minimum documentation loans, i.e., no income, no job and no bank deposit verification loans.

Its most "famous" loan was the NINJA loan - the No Income No Job (No) Assets loan.

Yes - you read correctly.

HCL Finance, Inc provided money to people with 1) no income; 2) no job AND 3) no assets.

Honestly Lay Bare is not suggesting that HCL Finance, Inc was responsible for the credit crisis we now find ourselves in. Indeed there are many other great examples of conceptually challenged loan structures.

The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

Just so you don't think that Honestly Lay Bare is making this up - here is a link to the NINJA loan application form.

https://broker.hclfinance.com/downloads/NINJAStack.pdf

**

Risk management is a very simple concept at its core.

It is predicated on the management of risk.

At what point did the risk management framework within HCL Finance, Inc. consider it a good idea to loan money to a demographic that had no reasonable basis for repayment?

Assuming for one moment that there is no fraud involved - and Honestly Lay Bare is not suggesting that there is - how then is it possible that a sound corporate governance environment with strong theoretical risk management frameworks and compensating internal controls could firstly conceive a NINJA product and then secondly allow for it to be released?

We as interested spectators need to decide whether it was HCL Finance that was at fault in the pursuit of a quick profit or the profession, concept and theory of risk management that failed HCL Finance.

If it is the latter, then we can truly say that ninjas destroyed risk management.

For a discipline dedicated to the elimination, mitigation and reasonable acceptance of risk should never have allowed the ninja to be born.

They Say You Want a Revolution ...

These concepts are so strong that they supersede any empirical observation.

In a recent edition of Nature - the international weekly journal of science - Jean-Philippe Bouchaud has a great essay titled Economics Needs A Scientific Revolution.

As Honestly Lay Bare read through each passage, it was difficult to think that Bouchaud was not also challenging the world of internal audit and the independent assurance that she seeks to provide to interested spectators.

"Rockets fly to the moon, energy is extracted from minute changes of atomic mass without major havoc, global positioning satellites help millions of people find their way home. What is the flagship achievement of economics, apart from its recurrent inability to predict and avert crises, including the current worldwide credit crunch?"

**

What exactly is the flagship achievement of internal audit or for that matter risk management?

There was an internal audit function at Enron.

There was ample risk management skill sets within Lehman Brothers.

That being the case, was it not the skill sets that let the disciplines down but the frameworks against which they operated.

As Bouchaud notes:

"Classical economics (read here internal auditing / risk management) is built on very stromng assumptions that quickly become axioms - the rationality of economic agents, the invisible hand and market efficiency etc (read here COSO / ERM and any number of national standards on risk management).

Physicists, on the other hand, have learned to be suspicious of axioms and models. If empirical observation is incompatible with the model, the most must be trashed or amended, even if it is conceptually beautiful or mathematically convenient."

**

Where post Enron and Lehman has there been an examination of the underlying frameworks upon which our independant assurance is based?

We have always held the truths to be self evident that a strong control environment is one where there are policies and procedures - but what if that isnt the case?

What if the tone at the top is overrated? We have all seen the many studies that show that corporate governance may or may not correlate to strong economic performance.

**

Honestly Lay Bare is of the view that we have the right framework but that we lose the opportunity with each case study of distress to retest the frameworks for ongoing relevance.