Friday, March 06, 2009

Steve Liesman on Inputs vs Outputs

I've been blogging recently on Inputs vs Outputs, or Why Controls Are Not Sufficient. I've also been writing about Wall Street for the past year and a half. What we are seeing in the business realm is one of the biggest incident response engagements the world has ever seen.

This morning on CNBC's Squawk Box, reporter Steve Liesman summarized the market's reaction to the ongoing crisis. The latest jobs report had just been released, and panelists were debating the effectiveness of the administration's announcements of various plans. Steve said:

It's not what you're doing that matters; it's whether or not it works.

In other words, focusing on the inputs as a measure of success is a waste of time. You have to know the score of the game. In the business world, the score of the game is measured using employment numbers, stock market prices, the London Interbank Offered Rate (LIBOR), currency valuations, and so on. My post Controls Are Not the Solution to Our Problem has one set of ideas for measures in the digital security world.

Richard Bejtlich is teaching new classes in Europe and Las Vegas in 2009. Online Europe registration ends by 1 Apr, and seats are filling. "Super Early" Las Vegas registration ends 15 Mar.


Gunnar said...

actually the Wall St mess is a case in point of why need better controls. The unregulated derivatives market and shoddy accounting led us to where we are today.

But hey, don't take it from me (and certainly take anything on CNBC with a heaping dose of salt), instead listen to Warren Buffett and Charlie Munger, call it security, call it controls I dont care what you call it but our systems our unreliable today, we dont have a single system with integrity, we need margins of safety:

"The system is almost insanely irresponsible. and what people think are fixes aren't realy fixes. It's so complicated I can't do it justice here - but you can't believe the trillions of dollars involved. You can't believe the complexity. You can't believe how difficult it is to do the accounting. You can't believe how big the incentives are to have wishful thinking about values and wishful thinking about ability to clear.

People don't think about the consequences of the consequences. People start by trying to hedge against interest rate changes, which is very difficult and complicated. Then, the hedges make the [reported profits] lumpy. So they use the new derivatives to smooth this. Well, now you've morphed into lying. This turns into a Mad Hatter's Tea Party. This happens to vast, sophisticated corporations.

Somebody has to step in and say, "We're not going to do it - it's just too hard."

I think a good litmus test of the mental and moral quality at any large institutions [with significant derivative exposure] would be to ask them, "Do you really understand your derivatives book?" Anyone who says yes is either crazy or lying.

It's easy to see [the dangers] when you talk about [what happened with] the energy derivatives - they went kerflooey. When [the companies] reached for the assets that were on their books, the money wasn't there. When it comes to financial assets, we haven't had any such denouement and the accountings hasn't changed so the denouement is ahead of us.

Derivatives are full of clauses that say if one party's credit gets downgraded then it has to put up collateral. It's like margin - you can go broke [just putting up more margin]. In an attempt to protect themselves, they've introduced instability. Nobody seems to recognize what a disaster of a system they've created. It's a demented system.

In engineering people have a big margin of safety. But in the financial world, people don't give a damn about safety. They let it balloon and balloon and balloon. It's aided by false accounting. I'm more pessimistic about this than Warren is."

nasirfk said...

It's not a matter of control anymore. We have seen controls and additional controls after Enron scandal. We have even experienced controls over controls.

I think that the very models on which the business is based upon need a drastic change. It's like going back to the drawing board at the academic level after a crash.

I am sure most of business schools must be doing that at the moment i.e. going in search of new models and discarding whatever we learned in the last several decades.

Anonymous said...

steve liesman is constantly spinning ! lies almost everyday about something . and never admits when he is wrong!!!!! he recently told peter schiff that he was wrong and didnt predict this crisis ! is he nuts ? peter has got it right on just about everything . not all but alomost . steve hasnt got anything right ! i think i just jealouse . he should drink the kool-aid with jim cramer ! he actually thinks the economy is getting better and has reached the bottom ! yeah ! keep dreaming ! cnbc = spinning , lies , deceit . cannot be trusted !