Sunday, January 27, 2013

Roots of Risk

I've had the experience twice in my life.  Once was on a Hunter 45 sailing south from Sydney towards the Bass Straits and once was in an Vesper 15 kayak paddling out of the Chilkoot Inlet in Haines Alaska.  The seas were rough but manageable and the thrill of pushing the prow through the rolling spray was intoxicating.  And then, as if knowing that I was beginning to feel a sense of dominion over the wind and waves, on the horizon came the foreboding apparition of swells, vast and terrible running in a cross current to the chop I was navigating.  The impulse to turn back danced with the impulse to rise to the taunting, inviting seas and, in both instances, I had the good sense to let the latter win.  Otherwise, I couldn't write this post.  Crossing the line into that which is so evidently more powerful than one's own capacity is where you learn to dance with the cosmic forces far greater than you.  It's where all faculties are most acute making all senses palatable and incarnate into the deepest sinew.  You're alive!

My experience was harmonic with the 8th century BCE reality embodied in Homer's Rhapsody M.  Here the sea cliffs (Latin: risicum) are fitted with a olive tree root (Greek: rizikon) to which Odysseus clings to save his life when his ships are crushed.  It was the Romans who chose the "cliff" part of this Greek allegory which began framing our ontology of "risk" meaning the possibility of adversity, loss, injury, or harm.  The idea of risk intersecting with finance was born of Mediterranean, French and English traders who used the term to refer to unavoidable losses at sea.  The insurers of modernity are inextricably linked to the Lloyds of London insurers who integrated the Arabic az-zahr for dice into the French game using dice hasart and merged this into the commercial loss at sea (hazard) insurance of today.

This week I encountered financial "risk" on several occasions.  The term is thrown about most often to justify Ignorance Enhanced Usury - one of the most ubiquitously condemned practices throughout ALL human traditions - which is alive and very well today.  The reason why venture capitalists are 'entitled' to higher returns is because start-up ventures are 'risky'.  The reason why the largest 'ethical' fraud on the planet - microfinance - has to be fraudulently laundered as social responsible investing (now, politically correctly called "impact investing") is because this 'risk-distributed' financial source provides capital in 'risky' markets.  The way to understand the 'opportunity' provided by a novel business is to get one's head around all of the 'risks'.

Investing in a country other than a member of the G-20 does not involve more 'risk'.  It involves personal interaction.  That's right, when you become a trusted counter-party in any jurisdiction you: a) make more discernment-filled decisions; and, b) have others who align their interests with your own thereby stabilizing an environment in which mutual benefit is possible.  Rooted in mutual understanding and informed respect, one actually reduces the likelihood for loss and harm.  Investing in a start-up venture does not involve more 'risk'.  Demanding that a new venture yield cash sufficient to pay back effective interest rates at over 25% is lunacy and it is the capital providers - not the ventures themselves - that actually fail in their investments.  Ironically, statistics on business start-ups are horrifically misleading.  Many of them make it.  Tragically, the ones that get usury financing - the venture capital lot that are publicized and therefore counted - fail at an observable scale because the capital was asymmetric to the business productivity.  Rooted in aligned, productive focus, strategic capital actually nourishes the growth of business for greater productivity in the future.  Fear and ignorance in markets do not necessitate more 'risk'.  Providing prudential confidence derived from empirical experience in the form of insurance can root a venture confidently in an environment perceived to be filled with uncertainty.

Listening to an executive from one of the world's over $1 trillion asset banks this week, I was particularly fascinated with his use of the term 'risk'.  Without exception, one could have substituted the word 'ignorance' for every use of 'risk' with exactitude.  An intrepid group - to which this man belonged - within the bank is trying to encourage greater transparency and innovation.  Regrettably, the roots of this bank are in privacy and secrecy - insuring that deposits and transactions happen within occult discretion.  When one attempts to insert transparency and innovation into a structure whose foundation was the precise opposite, the inertial dissonance is self-evident.  Going into 'riskier' markets?  I think not.  They were just going into markets where they have institutional ignorance.  Not sure how to quantify the 'risk' and 'returns' in new assets?  I think not.  They were incapable of considering metrics that were transparency-optimized rather obfuscatory in nature.  I recalled a conversation with my dear friend and, without exception, the most enlightened member of a banking executive team (also over $1 trillion in assets and also European based).  We were sitting in the rain talking about the history of his bank - one that grew from agrarian roots - and I challenged him with the following question.

"Why is it that we don't have Chief Synergy Officers to insure borrower success in all banks where we have Chief Risk Officers to hedge against borrower failures?"

The answer is self-evident.  Somewhere between the 8th century BCE and Lloyds of London we elected one of the two metaphors given the world by Homer.  And in times of fiscal cliffs, global financial risk, and perils on every side, we are blind to the alternative - the rizikon or root.  If we saw the story for its other narrative - the one where the crushing stones done dash the boats into pieces and send hundreds of men to their deaths - we'd see the story that calls for heightened, total environmental awareness.  An awareness that lets you see the root of an olive tree to which you can cling and rise to new, epic heights.  Abandon that which you've called risk that is fear, ignorance, and in its worst, immoral usury and abuse.  See the root that feeds the succulent olives, cling to it, and truly live!


  1. David, "you've hit the nail square on the head". What these imbeciles are not admitting to (but this Gennie is out of the bottle as well), is that, "they do not wish - do not want - could not care less - about providing credit to "SME Enterprises" since, as far as they are concerned, the SMEs should "just go on and die off", and no one would notice. Why? Consider this :
    a. As you know, more than 90% of "Big Bank Profits" come from "less" than 15% of the clients.
    b. However : more than 90% of the new jobs are created from the 85% of the SME block, which the Big Banks do not wish to look at since it is a bother.
    Therefore : They invent all sorts of "stories as to why they need to "gouge" the "SME Company" - when in fact, what they are doing, is using this "excuse" to ensure the SME destruction.
    (We touched on this, when you were in Toronto).
    Consider the following : An SME wishing $500K to expand operations - start operations - and good production :
    c). You set up the credit for $1 million :
    d). $500K is paid to an insurance policy "to cover the other $500K - 1 : 1 - and the loan is set up for ten (1) years, @ 7-10% per annum;
    e) It is advanced in 3-5 days - with all docs in order.
    f). The SME makes payments - no defaults - AND - at the end of the payment period, the SME gets back 80% of the funds paid into the insurance policy.
    g). In the meantime : "with the "products" production - the "producer" - "deposits into the bank a Bill of Exchange...(You have to feed the SYSTEM PAPER..!!!!)..
    h). The products are delivered - paid by the buyer / counterparty - and the Bills of Exchange settled...(the process is repeated over, and over..WITHOUT ANY RISK TO THE BANK.
    i) The "downside" to the bank is that these are "small deals" - and not the $1 billion, per piece of paper they are used to - since - THEY NEED TO FEED THE SYSTEM PAPER - and to "assemble $1 billion, in $500k - $1 million pieces of paper, "it is a LOT of work" - as opposed to the Big Bank, "issuing a $1 billion paper, which they sell at a discount to face value, and they "increase their operations" WITHOUT having created ANY value - ANY product - ANY economy - ANY job...!!
    I know, we will change this David, and have made big strides on this path..and we have "disciples", "adherents", "and users" of the "idea" as above set out..
    We need you - we must have your kind assistance, to "expand" its use, since, "Figures Dont Lie and Liars Dont Ligure"...!
    Best Always,
    Anthony Diamond.

  2. While the politicians fight over who will be first to extend unemployment benefits like dogs over a media porkchop, the very businesses who would hire those workers for good wages starve for want of operating capital. The top banks swim chummed Wall Street gutters while Main street companies hock their furniture for inventory loans. The Executive Branch shouts for more taxes, while the true solution of more taxpayers goes unheaded. Let the banks fail from their own greed and fear.

  3. Thank you for so bravely articulating the truth. "Know ye the truth and the truth shall set you free."

    It seems the above referenced institution is scrambling for some good PR as it tosses around the words "impact, transparent, sustainable, risk."

    Yes, yes - a 'Chief Synergy Officer' in every bank.

    A book that I've just recently begun reading is: "The Spirit Level: Why Greater Equality Makes Societies Stronger" by Richard Wilkinson and Kate Pickett. It represents a major study of the effects of inequality on society.

    Thank you again for your candor and "transparency!" ; )

  4. I had hoped to get to more of this discussion during our time with the bank, David. There is a glaring difference between the real risk to the physical and social world, and financial risk. Capturing the etymology and ontology of the adjacent issues in your paper is enlightening and thrilling. What is next for you? What remarks did you deliver to the assembled ibankers the evening before?
    All my best,

    1. Ironically, physical HAZARD, social SENSIBILITY/SENSITIVITY, and financial ARBITRAGE are not appropriately interchanged. None of them are appropriately constrained to adverse distributions and expectations which yield "AVOIDANCE" responses at the exclusion of "ENGAGEMENT". Removing the Ignorance Arbitrage from all dimensions is done not by acts of destruction but by constructive collaboration, information sharing and experiential narrative formation.

  5. Hi David
    Not sure if read this Island Business article on IP, with some of your quotes.

