Category Archive

Innovation/Global Risk 

The Inside Story About MF Global: $1 b. of Customer Money Is STILL Missing 

By Shlomo Maital

An investigative report in the Global New York Times, by Azam Ahmed, Ben Protess and Susanne Craig, tells the full story of the shocking bankruptcy of MF Global, a hedge fund led by former US Senator , NJ Governor and Goldman Sachs head Jon Corzine. *  The report gets the back pages, but deserves the front page. When someone as visible as Corzine destroys over $1 b. in ordinary people’s money, it deserves attention and outrage.   Especially, in the age of Occupy Wall St., when regulators are supposed to be alert enough to keep such things from recurring. 

    Here is the essence of the story.  Corzine ran MF Global for 19 months.  He played an active, hands-on role, calling himself “chief risk officer”.  He pushed through a $6.3 billion bet on European debt, leveraging his firm’s capital 5 times and even though board members and MF executives protested! 

   MF Global filed for bankruptcy last Oct. 31.  But 10 days before that, facing ‘margin calls’ (losses that required it to ante up more capital to provide collateral for borrowed money), MF Global chose to dip its greedy ugly hands into the money of its customers, money it was not allowed to touch and for which it had strong fiduciary responsibility to protect.  It is one thing for a hedge fund to lose money in trading with its own money. It is another thing to cover such losses by stealing the money of customers who entrusted their money to it in good faith.  Such horrendous misdeeds destroy the entire foundation of the financial services industry, based on trust.   

   Corzine bet that Europe would not let its euro nations default on their bonds, and took on trades of $6.3 b.  He might ultimately be right – but the bond market still thought chances of default were high, and smashed down the prices of the bonds Corzine bet on.  Corzine was unable to meet margin calls as his bet turned sour. 

   According to the NY Times, Corzine “torpedoed an effort to build a new risk system, a much-needed overhaul (at MF), according to former employees, arguing it was ‘unduly expensive’.”  

   Corzine’s plan was flawless.  Borrow money. Use it to buy bonds of Italy, Ireland and other troubled nations.  Buy ‘short’ bonds that mature at the end of 2012.  Assume the bonds will be paid in full at maturity, because the EU will bail out the troubled nations.  And this is what will happen. Except, in the interim, during the recent crisis, the bond prices fell so steeply that Corzine’s MF fund did not have enough collateral to cover the loans.  If you cannot ante up enough collateral, you are forced into bankruptcy.  And even after Corzine’s MF fund stole a billion bucks worth of its customers’ money, it still wasn’t enough to forestall bankruptcy on Oct. 31.  Now, people are looking for the ‘customers’ funds’ MF Global stole.  This is pointless.  It is gone. 

    Every time an episode like this occurs, people talk about ‘rogue traders’,  ‘errant truants’, and ‘one-off mistakes’.  But they happen far too often.  And the irony is, the European debt trades Corzine initiated will ultimately be profitable – but not in time to save MF Global.  In finance, as in comedy, timing is everything.

* “The high-roller behind MF Global’s demise”,  Global NY Times, Dec. 13/2011. 

Innovation/Global Risk 

How to Combine ‘Reduction’ and ‘Nostalgia’: The case of “The Artist”

By Shlomo Maital  

 Michel Hazanavicius

 Feature films have generated a massive amount of junk, and perhaps a less massive amount of astonishing creativity.  According to pictureshowman.com,  some 210,841 feature films were made, between 1906-99, in 51 countries, from Algeria to Yugoslavia;  tied for the lead are the U.S. and India, with 31,000 each.  From 2000-2010,  approximately 50,000 feature films were made,  with India (Bollywood) now leading  the U.S. (Hollywood) by a wide margin.  With so many feature films existing, one wonders how it is possible to come up with truly new ideas for films.

   According to columnist Maureen Dowd, writing in The New York Times, a new feature film “hit the Cannes Festival like a thunderclap”.   The film was written and directed by a French writer, Michel Hazanavicius and is called “The Artist”.  It is about a silent movie star who can’t accept talkie films and crashes and burns.  And yes, the film itself is silent.  No sound.  Silence. 

   “The Artist” merges two key principles of innovation. One is “reduction” or “subtraction” – innovate by eliminating rather than by adding.  Hazanavicius eliminates sound, but rather, adds silence, perhaps the rarest of all luxuries in modern life. (When did you last enjoy true silence? Where can you actually find true silence?).   Indeed, reducing, or subtracting, features from existing products or services actually adds to them – adding simplicity, which is also an increasingly rare attribute of modern life. 

     The second is ‘nostalgia’ – evoking something we once loved but which became obsolete.  Silent movies were made obsolete by sound tracks – just as TV replaced radio, cell phones replaced payphones, laptops replaced desktops, wireless replaced modems.  Why not think about ways to restore legacy technologies in unique creative ways? One of my early blogs was about a retro-cycle: A bicycle without brakes or gears. 

    Hazanavicius began directing in 1988.  He directed commercial advertisements, then created a feature-length film made up entirely of clips from old Warner Bros. studio films.   Making a silent film was a huge gamble, which paid off.   

    Dowd quotes Hazanavicius on silence: “I compare [silence] to the zero in mathematics. People think it’s nothing, but actually it’s not.  Silence can be very powerful”. 

Innovation/Global Risk 

Are Creative People Dishonest?

By Shlomo Maital  

 Dan Ariely 

The latest (Dec. 7) issue of Harvard Business School’s publication Working Knowledge has a piece by editor Carmen Nobel that I found disturbing.  According to Nobel:

  In a series of studies, Francesca Gino and Dan Ariely found that inherently creative people tend to cheat more than noncreative people.    

 ● Inherently creative people tend to cheat more than noncreative types.

● Furthermore, inducing creative behavior tends to induce unethical behavior.  

   Gino and Ariely surveyed 99 employees across 17 departments at an American advertising agency, where some jobs—copywriting, for example—required much more creativity than others. In the anonymous survey, on a seven-point scale, the respondents indicated how likely they were to engage in various ethically questionable work behaviors such as “take home office supplies from work” and “inflate your business expense report.” Respondents also evaluated scenarios describing a hypothetical person who has the opportunity to behave dishonestly, and then indicated, again on a seven-point scale, how likely they would be to behave unethically in each instance. Finally, the respondents reported how much creativity was required in their respective jobs, with three managers in the executive office rating the creativity level required in each department, as well.  Overall, the researchers learned, the higher the creativity required for the job, the higher the level of self-reported dishonesty.

    Gino and Ariely note:  “As a manager, if you’re highlighting the importance of being creative and innovative, it’s important to make sure that you’re stressing the presence of ethics, too,” Gino says. “Dan and I are of the hope that managers will start thinking about how to structure the creative process in such a way that they can keep ethics in check, triggering the good behavior without triggering the bad behavior.”

   I teach my management students that innovation is breaking the rules.  I don’t mean, of course, breaking the law.  But, are those able and willing to break the ‘rules’ or ‘conventions’ also more able and willing to break the law?  This seems to be the simplest explanation of the phenomenon discovered by Gino and Ariely.

  Perhaps we need to redouble our efforts to to find effective ways to teach ethics in management courses, along with innovation.  I myself intend to do this. 

  Maybe there is some comfort in the fact that creative people are very honest about self-reported dishonesty.  Maybe creative people, who break rules all the time, are simply more honest about being dishonest than less creative people. 

Innovation/Global Risk 

Titanic’s Lesson for the World 

By Shlomo Maital  

   The RMS Titanic sank almost a century ago.  Since then she has served as a sad lesson for innovators, on the consequences of arrogance.  Built to carry 3,500 people, Titanic had 2,223 people on board during its maiden voyage, and sank at 2:20 a.m., on April 14, 1912, with 1,517 people perishing in the frigid Atlantic waters.  The reason: There were lifeboats only for 1,178 people, because the Titanic was “unsinkable”. 

   But I believe there is another key lesson the Titanic conveys:  Strategic agility. Nations need to constantly evaluate where their competitive advantage lies, and adapt and reinvent it when technology and markets change and shift.

    Titanic was built in the shipyards of Harland and Wolff for the Cunard Lines, in Belfast,  Ireland.   It was the only shipyard in the world capable of building the advanced vessel, which weighed 45,000 tons (a modern aircraft carrier weighs over twice that, but recall that it has a large steel deck for launching and landing planes).  It was built by a highly skilled workforce of 15,000 workers, all men (no women were allowed to do the hard physical work).  But women also had good jobs created by Titanic – they wove the textiles needed for the 45,000 napkins and 12,000 sheets, and thousands of tablecloths used on Titanic.   One of the key skills in building Titanic was riveting. It took a riveter five years to learn the craft, driving white-hot rivets into steel plates, so that they could contract when they cooled and tighten the joints.  Many millions of such rivets went into the Titanic.  Riveters were paid according to the number of rivets they drove. 

    At the time, Ireland had a global competitive advantage in shipbuilding.  As the world changed, and as shipbuilding evolved and moved to places like Korea, Ireland lost jobs, income and exports.  In part, Ireland was preoccupied with its struggle for independence from Britain (in the end, Belfast remained in what became Northern Ireland, a part of the United Kingdom).  It took Ireland some 75 years, until a few clever officials from the Irish Industrial Development Agency figured out how to attract American companies to Ireland, to generate quality jobs like those the Titanic once supplied.  During those 75 years, many Irish emigrated abroad, because they found no work at home.  Ireland itself became not unlike the Titanic – it sank, becoming one of the poorest countries in Europe. 

    Ireland again finds itself in trouble. After a hasty government bailout of its troubled banks, the Irish people drown in debt, and the new Irish budget announced today (actually, the budget is so tough, the government will reveal it over a two-day period, to soften the blow) is severely austere.  The Prime Minister’s tough address to the nation backfired, as the Irish people seek solutions, not statements of the problem.  Unlike the Titanic, Ireland seems to be sinking ever so slowly – but surely.  The people of Ireland deserve better.   

   Today nations are sinking, in Europe and elsewhere, like Titanic.  They are unable to adapt to changing geopolitical realities.  As we mark a century since Titanic’s launch and tragic sinking, let us recall what Titanic teaches. 

Innovation/Global Risk 

How to Win a Nobel Prize II

By Shlomo Maital

 Prof. Avram Hershko, Technion 

 In my Oct. 7 blog, I told the story of how Prof. Dan Shechtman won the Nobel Prize, for his discovery of quasi-crystalline matter.  The formula he used was: 1. Read Jules Verne and dream, and 2. Believe in yourself, and maintain your integrity, if you see something strange, insist that you saw it, despite the nay-sayers, famous ones, who tell you, that you didn’t, couldn’t, wouldn’t. 

   I recently had the privilege to interview another Nobel Prize winner from my university, Technion-Israel Institute of Technology, Prof. Avram Hershko, who won the Nobel Chemistry Prize in 2004 for his discovery of ubiquitin, which holds the key to understanding why cells die.  Based on his discovery, a new drug, Velcade, was developed, which has saved the lives of many thousands of cancer sufferers (including a close American friend of Prof. Hershko).   

  Here is Prof. Hershko’s formula for winning a Nobel, which is somewhat different from Dan Shechtman’s.

  1.  For your research, pick a problem you believe is important, but that is NOT in the mainstream of scientific research.  On his post-doc in the U.S., Hershko found that he was joining a 25-person team, who were mostly focusing on cell division (i.e. cell growth).  He chose to study why cells die, because he thought it was important and because no-body else was interested in studying it.  This is the scientific equivalent of ‘blue oceans’ – seek areas that are not crowded, because research topics already crowded are competitive and likely to be dominated by those with massive resources. 

 2.  Be patient and persistent.  If you choose a hard problem, Hershko notes, you will need to be very patient in understanding the phenomenon under study.  Hershko is a true bench scientist.  When I interviewed him, he was gracious, but in the midst of an experiment…  and he confessed to deeply loving bench work, which the Nobel Prize did not in any way interrupt (except for 6 months of travel on behalf of Technion). 

 3.  Be lucky.  Scientific breakthroughs come often through lucky breaks. But, Hershko cautioned, you need to be prepared for the luck.  When you get unexpected results, often they are tossed out.  Don’t!  Recognize your luck, and look into why those results occurred, against your expectations.  As Pasteur affirmed, “chance favors the prepared mind.”  Prepare your mind.  And keep it open.  Do not allow ‘perceptual blindness’ to prevent you from seeing what really exists.  Shechtman saw something that could not possibly be there.  Hershko saw results that were highly unexpected.  Both had minds open enough to see what was there.

  4.  Stay small.   Nobel Prizes often (though not always) bring the possibility of a flood of new research money.   Prof. Hershko has purposely, and doggedly, kept his lab research small and intimate, so that he can maintain control and his own active leadership.  Size and scale often are bitter enemies of innovation.  By keeping his lab small, Hershko maintains its agility, flexibility and manageability.  He also has maintained his own active bench research, rather than become a ‘manager’ whose name appears on scientific papers but who is not really involved.

Global Risk/Innovation Blog

Systems Thinking: A Short Eulogy

By Shlomo Maital

  Prof. Jay Forrester, inventor of systems dynamics

You can argue that the world got into trouble for one key core reason: Lack of systems thinking. Risk managers failed to consider systemic risk.  Policymakers failed to take into account systemic interaction. European officials failed to realize the euro’s rot can destroy the global economy.  

   The fact is, we know a lot about systems thinking. We just don’t use what we know. Here is a short history, inspired by an inspired BBC documentary, “Machines of Loving Grace”, about how humanity has been ‘colonized’ by machines.

●    A British botanist, Arthur Tansley, invented the term ecosystem in 1935. He was inspired by Sigmund Freud, pioneer of psychoanalysis, and actually visited Freud, seeing an analogy between the interactive system of the brain and the interactive global ecosystem. 

●   Systems thinking then moved in two directions. Norbert Wiener developed ‘cybernetics’, the study of self-regulating systems. Cybernetics was embraced by the U.S.S.R. as well.  And MIT Professor Jay Forrester developed the SAGE early warning system, whose early computers based on vacuum tubes had nearly zero downtime, because they were self-diagnosing (each of 80,000 vacuum tubes could signal its imminent failure, and its location).  ● Forrester developed system dynamics as a discipline at MIT, when he moved from Electrical Engineering to MIT’s business school, and showed how businesses, economies, even the world, are all systems of feedback loops that can be modeled with computers.

● His pupils Denis and Danielle Meadows wrote Limits of Growth, for the Club of Rome, showing how global persistent economic growth is unfeasible (because eventually, we overpopulate ourselves, or pollute ourselves, to death, or run out of key resources and starve..there is no happy scenario with permanent growth).  All we can strive for is stability, which all ecosystems seek.

 ● Buckminster Fuller’s 1968 book Operating Manual for Spaceship Earth makes the key point that we are all ‘astronauts’ on a spaceship (Earth) and we “must operate exclusively on our vast daily energy income from the powers of wind, tide, water, and the direct Sun radiation energy”. 

   If you believe the world is one big ecosystem, then you should believe a) we need to better understand all the complex interactions and feedbacks in it, b) we have to stop placing human beings at the center of the system, because we are not,  and c) we must stop striving for perpetual growth, because by definition exponential growth can never be sustained in any stable system, but rather seek balance, harmony and collaboration among the parts of the global system.  And this is precisely what we are NOT doing today, as segments of the world try to face up to (or escape from) the current global collapse. 

Global Risk/Innovation Blog

Day Dreams without Day Doing = Unhappiness

By Shlomo Maital

   A report in Science  last year shows the following:

People spend 46.9 percent of their waking hours thinking about something other than what they’re doing, and this mind-wandering typically makes them unhappy. So says a study that used an iPhone web app to gather 250,000 data points on subjects’ thoughts, feelings, and actions as they went about their lives.  The research, by psychologists Matthew A. Killingsworth and Daniel T. Gilbert of Harvard University, is described in the journal Science.

 In other words:  we spend nearly half our time day dreaming, thinking about things other than what we are doing – clearly because what we are doing is uninteresting or boring – and then become unhappy, because the virtual world we dream about is far more wonderful than the real world we live in.

“A human mind is a wandering mind, and a wandering mind is an unhappy mind,” Killingsworth and Gilbert write. “The ability to think about what is not happening is a cognitive achievement that comes at an emotional cost.”  

Human brains are different from animal brains, because humans can imagine what does not exist.  This, however, as novelists and philosophers have noted endlessly, can make us both visionary and very unhappy.  

  I believe there is a fairly simple solution.  Continue to dream.  But do more to implement your dreams and to create the virtual world that your dreams envision. 

Global Crisis/Innovation Blog

History DOES Repeat Itself, Only Losers & Winners Change Sides

By Shlomo Maital

  British PM Lloyd George, after Versailles

It is not only those who forget history who are doomed to repeat it, as Santayana warned. It is also those who remember history who repeat it. 

  On June 28 1919, the Treaty of Versailles was signed, imposing on Germany the responsibility for World War I and with it, the demand to pay (in 2011 dollars) the staggering sum of $442 billion in war reparations.   Germany could not possibly pay this enormous sum, with its post-war economy depressed.  So it simply printed marks, paid the reparations with worthless paper, created hyperinflation that destroyed Germany’s economy, and set the stage for the rise of Hitler in 1933.  Hitler’s war machine created jobs, income and employment, and ultimately destroyed Europe in WWII.  

    After Versailles, the British economist J.M. Keynes, who attended it as British PM Lloyd George’s advisor, went home to Cambridge and wrote a book,  The Economic Consequences of the Peace, protesting  the war reparations and predicting accurately that the result would be to destroy Germany and set the stage for a second world war.  

   Fast forward.  Nov. 29, 2011.  It is now GERMANY that is imposing ‘reparations’ on Greece, only they are not war reparations, but penance for overspending.  Germany’s psyche has a deep scratch from the 1920’s hyperinflation and hence Germany utterly refuses to allow the European Central Bank to print money and bail out Greece, Ireland, Portugal, Spain and Italy, nations that overspent and overleveraged.  Germany remembers history – all too well. 

   The problem is, just as Germany could not possibly pay $442 b. in 1919, in war reparations, so Greece cannot possibly pay all the debt it has accumulated, especially when bond traders are betting against Greece and raising the interest rates on new Greek borrowing to astronomical heights – a doom loop that is inexorable and fatal.  

   So history is repeating itself.  A rich nation is imposing a huge tax on a poor nation, in the name of justice.  And the result?  It will be ruinous for Europe, just as WWI and WWII were.  As Joseph Nocera points out in today’s Global New York Times, Germany too will suffer, because when Greece and perhaps other nations leave the euro block, the resulting turmoil will greatly hurt German exports.  Nobody benefits from chaos. 

    Treated unfairly in 1919, Germany now does the same to the profligate nations of “Club Med”, as the Germans call them.  History does repeat itself.  Everyone will lose as a result. 

       Global Crisis/Innovation Blog

 How Strong Minds Raced So Weak Legs Could Walk

By Shlomo Maital

 ReWalk!

A U.S. National Football League charity campaign once used the slogan, “strong legs run so weak ones can walk”.  I recalled this during a visit yesterday to an Israeli startup named Argo, launched by Dr. Amit Goffer.  Argo’s product is called ReWalk, and it is an exo-skeleton (outside-the-body skeleton) which, with electronics, enables those who cannot walk to stand on their own two feet and walk at 2 km. per hour, a good clip.  ReWalk can also enable people to climb stairs.  You might call it, “strong minds race so that weak legs may walk”.  

   Dr. Goffer told us that following a terrible accident, which left him paralyzed and confined to a wheel chair, he asked an audacious question:  How can I create a device that enables people who cannot walk, to walk by themselves?  Dr. Goffer has three degrees in electrical engineering, and worked for years at Odin Medical Technologies, which he started (real-time MRI images for brain surgery) and at Elscint (medical imaging).  In 1998/9 he conceived of ReWalk and built a prototype himself.  He described his approach to entrepreneurship:  “not succeeding is not in my vocabulary.  You create a corridor…you see a light at the end of it, and there are no exits, once you start you have to go all the way to the end, until you succeed.”  

   Goffer estimates there are 2 million persons in the U.S. alone who are in wheel chairs, and of them, some 500,000 could use ReWalk.  He is marketing the device to U.S. Rehabilitation Hospitals, including the Veterans’ Administration.  There are two models: one for institutions, like hospitals, and the other, for purchase by individuals.  Argo has venture funding and employs 15 people in Israel, one in Europe and four in the U.S.  It has several patents.  

    We saw a demonstration of ReWalk. Attached to a disabled person’s legs, it uses an electronic sensor device on the person’s wrist to move each leg forward, when the person (on crutches) leans forward.  The battery power is carried in a small backpack.  The device makes a whirring noice, that is not unpleasant or loud.  The price is currently $90,000 per device, in the U.S., and 90,000 euros in Europe.  This price will decline as large-scale manufacturing occurs.  It finds use both as a ‘walker’ and as a rehabilitation device to help those who have been injured.  By putting those confined to wheelchairs on their feet, erect, it essentially moves them from ‘disabled’ to ‘enabled’.   Goffer himself cannot use his device, as he is quadriplegic.  But he nonetheless wants to get his device to market quickly.  I told him I thought a great many people are waiting for it.  “I know,” he said.  This is why he and his team are working very hard.  Production currently takes place at the company’s offices in Yokneam, a northern suburb of Haifa.

   Check out www.argomedtec.com; this device is quite amazing.   

    Global Crisis/Innovation Blog

 Understanding How the 1% Duped the 99%:

Why Russian Roulette Does Not Enhance Wellbeing

by Shlomo Maital

   Thick fog covers the current reportage on the global crisis.  Here is my brief attempt to slash through it, in 197 words.

   Commercial banks, investment banks, hedge funds and other financial firms deceived themselves and duped the world. They believed they were making high financial returns, justifying bloated compensation for themselves and their shareholders.  But it was a fake.  There was no real value. Financial returns must be adjusted for risk.  When you subtract risk from return, their investments were massively in the red. Why? They failed to take into account systemic risk – collapse of asset prices when the bubble they created bursts.  None of the risk assessment models sufficiently accounted for systemic risk.  If there were real economic value in this deception, then everyone in the world could grow wealthy by playing Russian Roulette, as one wag observed.   There is inherent built-in deception in financial services.  Investment firms trumpet their historical rates of return. But they never advertise or quantify their risks.  No investment can be evaluated, without knowing those two key numbers: return and risk.  Never invest  when you are told only the historical return.  The entire world did.  And look where it got us.  And guess what – we are doing it again.   This is how some (not all) of the 1% in finance duped the 99% who do real work.   

   It now looks like the intransigent European Central Bank, which insists on fighting phantom inflation during a terrible deflation, will utterly fail (or not even try) in rescuing the euro.  Look for a ‘haircut’ in the Euro nations, down from 17 to about 8, mainly the northern high-saving countries, and a prolonged period of recession as Europe reorganizes its Single Market into North and South segments.  Belgium’s sovereign debt has now been down-graded and it looks like Spain, too, needs a bail-out.   America, too, continues to drown in debt, and personal saving, which rose to 5 per cent, is now down to only 4.  Black Friday (the day after Thanksgiving, when mobs storm the shopping malls to waste money on useless trinkets) is indeed Black, for America and the world.