An interview with Carlos Warner of the federal public defender’s office in the Northern US District of Ohio, which represents 11 of the detainees at Guantánamo Bay Prison

The idea that as innocents, we are free, would seem a logical moral conclusion to any discussion around justice.  It would also seem an abhorrence that a modern democratic country would act against this principle.

At Guantánamo Bay Prison (Cuba), the United States government has done just that.  As part of an ongoing “war on terror” they have subjected hundreds of men to some of the most extreme forms of mistreatment seen in the modern world.  There is little doubt that some of those who were rendered to Guantánamo were connected to acts of terrorism or combat activities, but the vast majority were not.  The (roughly) 166 who remain are predominantly innocent men- many of whom have been declared innocent by the US government, but who are now approaching the 12th year of their detention- without trial, and with practically zero hope of release within their lifetimes.

Faced with this fact, and under deteriorating conditions- the majority of inmates have begun the largest hunger strike in Guantánamo history.   In April 2013, the New York Times carried the astonishing testimony of Samir Naji al Hasan Moqbel who is one of the prisoners on hunger strike “One man here weighs just 77 pounds. Another, 98. Last thing I knew, I weighed 132, but that was a month ago… I’ve been on a hunger strike since Feb. 10 and have lost well over 30 pounds. I will not eat until they restore my dignity. I’ve been detained at Guantánamo for 11 years and three months. I have never been charged with any crime. I have never received a trial. I could have been home years ago — no one seriously thinks I am a threat — but still I am here“.  He continues, “Last month, on March 15, I was sick in the prison hospital and refused to be fed. A team from the E.R.F. (Extreme Reaction Force), a squad of eight military police officers in riot gear, burst in. They tied my hands and feet to the bed. They forcibly inserted an IV into my hand. I spent 26 hours in this state, tied to the bed. During this time I was not permitted to go to the toilet. They inserted a catheter, which was painful, degrading and unnecessary. I was not even permitted to pray…  I will never forget the first time they passed the feeding tube up my nose. I can’t describe how painful it is to be force-fed this way. As it was thrust in, it made me feel like throwing up. I wanted to vomit, but I couldn’t. There was agony in my chest, throat and stomach. I had never experienced such pain before. I would not wish this cruel punishment upon anyone“.  Another inmate Fayiz al-Kandari describes how “…they won’t try us. They won’t let us live in peace, and they won’t let us die in peace“.

The situation at Guantánamo is a complex balancing act of national security, foreign policy, politics and law.  To learn more I spoke to Carlos Warner of the federal public defender’s office in the Northern US District of Ohio, which represents 11 of the detainees.

Q: What was the rationale behind the creation of the Guantánamo bay

[Carlos Warner] It was the brainchild of Dick Cheney, Donald Rumsfeld and Paul Wolfwitz.  They picked Guantánamo as they believed it was beyond the reach of all law.  Obviously United States law, but also international law and beyond that the Geneva Conventions.  It was picked purposely to be a legal black hole where the United States could bring people for (what was very publically stated as) interrogation purposes.  It’s obviously no longer that, and is a ‘Frankenstein‘ of its original form.

Q: Did Guantánamo meet any of its ‘objectives’?

[Carlos Warner] Absolutely not.  We’ve all heard President Obama state how Guantánamo actually cuts against our national security by remaining open.  The best words come from the Bush Administration itself… Col. Lawrence Wilkerson (who was Colin Powell’s Chief of Staff) talked about how the vast majority of the people brought to Guantánamo were innocent- and how people like Cheney, Rumsfeld and Wolfwitz believed that holding innocent people was just collateral damage in their war on terror.

Guantánamo has created more terrorists than have ever passed through.  It is the major recruiting tool used… it inhibits the United States’ ability to talk about human rights on a global scale… when you have the UN calling-up the United States on their human rights abuses at Guantánamo it makes it very difficult for the United States to then go to other places in the world and demand that they apply human rights.

Guantánamo has been a complete and total failure and I don’t think there’s a rational argument that it’s anything other than a terrible black mark on United States history.

Q: When did concerns begin to emerge about Guantánamo?

[Carlos Warner] There were red-flags in the public’s eyes from the very beginning, but within the administration there were major red flags about Guantánamo in 2002/3 when they saw the people who were being transferred there.   There were people transferred to Guantánamo who were sold for bounties, transferred there because of the watch they wore, where they slept or even just because they were Arabic men in Afghanistan.  They were rounded up, brought to Guantánamo and many of them have remained there over 11 years.

Mainstream United States citizens do not view the world the same way that Neo Con’s and Dick Cheney might.  Mainstream United States citizens maybe don’t understand who’s in Guantánamo, but they believe that men should be released if they’re innocent- and that men should be tried if the government feel they’ve done something.  That’s not how some of the darker forces in our government, back in 2002 under the shadow of 9/11 thought.  They felt that people should be held indefinitely- forever- just because they thought it was a good idea.

Q: What was the private sector involvement in Guantánamo?

[Carlos Warner] One of the first things I noticed during my trips to Guantánamo was that soldiers don’t do any of the menial tasks.  Guantánamo is run by a company called Bremcor – they do all the landscaping… do all the food… maintenance the trucks and do the grunt-work which you would normally expect the military to do.  Bremcor was there before the Guantánamo prison opened, and will be there long afterwards.

Guantánamo is extraordinarily expensive, even Obama said so.  Each detainee- even the innocent men- cost the United States around USD 900,000 per year.  The reason is that Guantánamo is on an island, in the middle of the Ocean and things need to be barged in.  It’s an expensive place, and civilian contractors reap many of those benefits.

Q: What is the reality of prisoner conditions at Guantánamo and interrogation/security strategy?

[Carlos Warner] During one of my first visits to Guantánamo, I saw a big coil of barbed wire set out in the middle of a small field.  It didn’t seem to be protecting anything.  I asked a soldier what it was, and after some thought- and even some checking- he answered that it was decorative.  You have a lot of that in Guantánamo.

The prison is not what it was in 2002.  Back then it was Camp X-Ray and these men were basically held in cages.  Now it’s more like what you might see in a modern prison.  It’s built around what you would normally see in the United States.  Sometimes these men are held in solitary confinement-  now, with the hunger strikes going on- nearly all the men are held in solitary, some for 24 hours a day.  Before the hunger strike, many of the men – and there are about 130 of them- lived in a very open and communal setting.  They had access to their cells, but were free to move about and talk to each other for around 22 hours of each day.

What makes Guantánamo so horrible is the fact that the majority of these men are innocent and have no hope of release in the future.  Our government has made no concrete steps to releasing these men- even the innocent ones who they agree should be released.  They have been incarcerated for 11 years, have no contact with their families and have a phone call here and there through organisations like the Red Cross.  Many of those at Guantánamo have grown from children to adulthood during their time there and their only portal to the outside world is people like me who come, visit them, bring them things and explain what’s going on.  They used to have access to some media- but for the most part they are held there indefinitely, for life- with no hope of release.

Nowadays these men are being held- there are no interrogations going on. Certainly back in 2002-2005 there were terrible interrogations.  I cannot speak for any individual client, but the kinds of things that went on at Guantánamo and other such places, have been widely reported.  Those things are viewed as torture now, we should admit they were torture and we- as a country- have to commit to never do those sorts of things again.  No matter how heinous we think an individual is, they are all human beings and should be treated as such.

Q: Do the detainees at Guantánamo have any legal rights or the ability to exercise such rights?

[Carlos Warner] Guantánamo was designed as a legal black-hole and remains as such.  There is no legal remedy, nor any legal options for the men held there.  These men are political prisoners, and the only way their situation will be resolved will be through political action in the US and abroad.

Right now there’s is a military commissions court at Guantánamo, but it does not operate under civil standards.  There’s no attorney-client privilege, hearsay evidence is admissible- and even the judge does not control his own court room.  Against this- you have the US Government saying that it is fair, transparent and just.

These men have a right to habeas corpus – in fact, I am assigned for habeas corpus purposes… but let me just briefly go over what the law on habeas corpus is.  Firstly, we have to accept that all allegations made by the government as being presumed accurate.  The burden of proof is on us to disprove what the government have said, and show it as inaccurate.  This goes against all principles of a fair hearing.  The horrible thing about it is that even if we were able to disprove the government, the US Courts have said they do not have the power to order someone’s release from Guantánamo.  Even if someone at Guantánamo is granted the writ of habeas corpus, there is nothing they can do with it.  They may as well hang it up in their cell as a certificate.  The people who have had their writs granted remain there.

Our government, under the auspices of national security have classified all the litigation.  I can’t even tell you on a particular case what the allegations might be against a particular client.  I can’t tell you if they’re true or false.  It’s like being accused of being in a bar-fight, but I can’t go to the bar, I can’t interview any patrons of the bar, I can’t take pictures of the bar… and I can’t even tell my client that he’s been accused of being in a bar fight.   To call that due-process is plain false.

In the case of Guantánamo we see due process as being split into three elements.  Firstly the Geneva Conventions, secondly the military commissions and thirdly a real trial- what we would call an Article 3 Trial in the US Federal Courts.

Congress and the President have said that Article 3 judges are ready, willing and able to accept the cases.  The problem is the restriction on bringing these individuals to trial in the first place.  The Government has effectively denied these individuals real justice- the chance for a full and fair trial in the Article 3 Courts.  I agree with the President.  If the Government can present a charge and prove it beyond reasonable doubt before a jury? …then individuals should be punished accordingly.

The military commissions are a complete mockery of justice.  Somebody in our Government was recording all attorney-client meetings… they were listening to them and redistributing them.  The prosecutors have had access to defence emails and files and have looked at those things.  The Judge does not control his own court room… and that’s a shame, as I hear he’s an incredible jurist.   You then get into the problem of the fact that these men cannot even choose their own lawyers! We have 800 years of history of trial and due-process history in the United States, and none of that is being applied in Guantánamo.  They’re applying lipstick on a pig down there and asking the world to buy it- well, I’m sorry- but the world is not buying it.  People have asked me if the military commissions are failing- and the fact is they have already failed.  It’s just a matter of when people will throw in the towel.  Certainly it would be unconscionable to execute someone under these circumstances, but that is just what our Government is doing.

The last part of this is the Geneva Conventions.  Guantánamo was designed for the purpose of avoiding the Geneva Conventions.  Dick Cheney, people of his ilk and even- at times- our own President have said that these people don’t fall under the Geneva Conventions because they are ‘enemy combatants‘.  They don’t wear a uniform…  Ari Fleischer last week said that he thought the Nazis were better than these people [at Guantánamo] because they wore uniforms! He said that on CNN!  The conventions state that you must have a full and fair hearing at- or near- the battlefield, to determine if you were part of an enemy fighting force.  These individuals have never had that.  They’ve had minimal due process in Guantánamo without lawyers.  Nobody can argue Guantánamo is at or near the battlefield.  The bottom line is that the Geneva Conventions don’t apply.

Cheney, Rumsfeld and Wolfwitz designed Guantánamo to be a place to be out of the reach of the law, and it remains so today.

Q: What is the background to the current hunger strikes at Guantánamo, and what do you see as being the outcome?

[Carlos Warner] The last widespread hunger strike at Guantánamo was in 2006.  This hunger strike occurred after 3 men purportedly committed suicide. During this time, the men’s Qurans were widely searched by linguists and soldiers- and they started a widespread hunger strike.  This ended when the military allowed the men to voluntarily surrender their Qurans instead of having them searched.  For 4 years, the Navy guarded the men and there was ‘detente‘ between them, and they got on famously.  The men recognised the guards were just people- there to do a job- and that it wasn’t their fault they were there.  You  didn’t hear of any discontentment in the camps for over 4 years.

In September of last year, this all changed.  The Navy handed off supervision of the camps to the army.  The guards were hardened veterans from Afghanistan and Iraq.  Many of them were involved in detention groups in those theatres.  That’s when the rules started to change.  Remember, these are innocent men… Someone in the army will have taken the view that ‘this camp doesn’t fit our view of what it should be…‘ – and the crack-down began.  Leaks of this started to leak out to the media in early January.  There was a shooting- where a man was shot with rubber bullets- unheard of before.  There was also reports that at Camp 7, at the military commission hearings, all the men’s legal documents and papers were being taken away once they went to court.  Nobody knew why this was occurring.  The situation came to a head in February  2013 when there was a complete shakedown of the camp.  The guards came and took everything away from the men and searched Quran’s in the same manner as 2006.  As a reaction, the entire camp began hunger striking.  I was in Guantánamo the week after this began, and 130 out of 166 men were hunger striking.    At the time, the military said ‘no this is a fraud, only 5 people are hunger striking‘ – but the number has slowly built and now the military say it’s 100- well, it’s still in reality 130.

There was another event on April 13th, where the men were attacked by the guards.  At the time, I said publically and privately, that we could de-escalate the situation and these individuals could start eating again if the military would have a negotiation and implement what they did in 2006, allowing the men to voluntarily surrender their Qurans.  The military has no institutional memory, and when I told them that in 2006 this was a solution? they simply didn’t believe me.  These soldiers simply continue to escalate matters to the point where now- they’re admitting that the vast majority of the camp is hunger striking, and being tube fed.  The military say that only two-dozen men are being tube-fed, but they never attach names to that.  It’s our view that they tube-feed a different two-dozen every day.

You are at a point now where the entire camp is dug-in and hunger-striking over this new regime.  Certainly the fuel driving the fire is the hopelessness of their indefinite detention.  They see no way out, and are now being locked down by a new military regime.  The military could end this hunger strike if it de-escalates, but it has so far not chosen to do that. Having an entire camp not eating food is not a sustainable solution for anybody.

You have 86 men who are engaged in a peaceful hunger strike.  These are men who the Government have agreed to release but refuse to release.  The Government are now force-feeding these men to keep them alive, when their only wish is to die peacefully.

The President swore in 2009 that he’d close Guantánamo within a year.  Someone close to the situation would tell you again, and underscore- that he could close it in a year- if he had the political courage to do so.  He has the authority to close Guantánamo, and could do so easily within a year.

The reality of this is that even the military have said that people will die if this continues.

Q: Is Guantánamo unique?

[Carlos Warner] The United States have detention facilities like this throughout the world. It’s part of what we do as a country.    Guantánamo is unique because of the type of people who are there.  It doesn’t even require debate, the majority innocent.  They’re being held there because we, as country, have no desire to release them.

In other parts of the world, I would hope that we pick people up off the battlefield, try and figure out who they are as part of a full and fair hearing, and if we find they are part of an enemy fighting force that has done bad things? we detain them… otherwise, we release them.  That is not happening in Guantánamo.

At Guantánamo, people are held indefinitely- for life- regardless of whether they were innocent when they arrived.

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By campaigning for justice at Guantánamo we are not stating that we should simply release everyone, but rather that we need to apply fair and just principles to assess those who are innocent (and deserve to enjoy their liberties as such) and those who are not (and thus who may receive punishment for their actions).

Regardless of the loopholes used, the fact remains that detainees at Guantánamo are Prisoners of War, and under the Third Geneva Convention they are expressly guaranteed fair trial rights- and as a Center for Constitutional Rights report states, “…these fair trial guarantees are considered so essential that ‘willfully depriving a [POW] of the rights of a fair and regular trial prescribed in this Convention’ is deemed a ‘grave breach’ of the convention – i.e., a war crime.”

Guantánamo is not unique.  In a 2005 interview, William Schulz [then] executive director of Amnesty International’s Washington branch described how “…the U.S. is maintaining an archipelago of prisons around the world, many of them secret prisons, into which people are being literally disappeared, held in indefinite, incommunicado detention without access to lawyers or a judicial system or to their families…” he added: “…in some cases, at least, we know they are being mistreated, abused, tortured and even killed.”

One of the core functions of government is to ensure that citizens of their country enjoy security.  This is something which you and I as members of a population assume governments will do- and often, we give little thought to how.  What we sometimes forget is that every decision a government makes is made in our name, and on our behalf.

Unless the madness at Guantánamo ends, we will all have blood on our hands.

http://thoughteconomics.blogspot.co.uk/2013/05/charity-philanthropy-society.html

An interview with Tim Berry, a world expert on business planning

Plans are the DNA of business, containing all the base information needed to form a strategic framework for the growth, direction and shape of an enterprise.

Whether you are launching a new business, growing an existing enterprise, or even creating a venture within an existing corporation- chances are the first step in your journey will be the business plan.  In fact, for those wishing to raise money (whether it be seed capital, or venture finance) the plan is certainly a pre-requisite.

Studies have shown that “except in a small number of cases, business planning appeared to be positively correlated with business success…” and that  “while analysis cannot say that completing a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business pan is also more likely to run a successful business” (Ding & Hursey, 2010)

Much has been written on the business plan, and for many- it seems an almost insurmountable hurdle to write (what they anticipate will be) a thesis length piece on ever minutiae of their idea.  The reality however, is far simpler…

To learn more about the secrets of the business plan, I spoke to Tim Berry.  He is co-founder of Eugene Social,  founder and Chairman of Palo Alto Software, founder of bplans.com, and a co-founder of Borland International.  Tim has dedicated his life to business planning.

Pamela Slim, author of best-selling Escape From Cubicle Nation, calls Tim the Obi-wan Kenobe of business planning.  Guy Kawasaki made him his business plan expert in How to Write a Business Plan. Jim Blasingame, the best-known small business radio talk show host, calls him The Father of Business Planning. Tim is also the official business planning coach at Entrepreneur.com.

He is author of books and software including LivePlan and  Business Plan Pro, published by Palo Alto Software, and The Plan-As-You-Go Business Plan, published by Entrepreneur Press. he has a Stanford MBA degree and degrees with honors from the University of Oregon and the University of Notre Dame. He taught starting a business at the University of Oregon for 11 years.

His website is at timberry.com and his main blog is Planning Startups Stories; he also posts on several other blogs including Huffington Post, Amex OPEN Forum, and Industry Word at sba.gov. He is an active investor member of the Willamette Angel Conference.

Q: How would you define the concept of a business plan?

[Tim Berry] A business plan describes ‘what‘ is going to happen- with metrics, responsibilities and as much reasoning and background information as is necessary to guide management towards the future.

Q: What are the key components of a good business plan?

[Tim Berry] I think there are five.

First is the review schedule.  Every plan should start with the understanding that everyone involved- even if just one person- will dedicate an hour or two every month to looking at plan versus actual analysis.   You have to know ahead of time that this will happen, it trains people to realise that this is about management and not just about ‘some document‘.

Secondly- milestones…  You need specific things that can be tracked and measured.  This could be the launch, a new product-line, a new version, a new location.

Thirdly-strategy.  To me this is summarised, economical and in context.  It could even be bullet points.  Strategies are very easy to conceive, but hard to execute consistently over time as there are so many distractions.  Strategies must focus on three elements.  Firstly ‘identity‘ – how are you different and special… the S & W of the SWOT… many people hate the term ‘core competence’ in this regard, but I like it.   Second is target market… what are you not focussing on, who isn’t in your target market.  Thirdly is matching the business offering to the target market and strategy.

Fourth is the basic numbers. In reality, all forecasts are wrong- all business plans are wrong- but they’re very useful for management.  It’s not just a one-time picture, it’s an on-going story.  You’re looking for lines not dots about how a company proceeds.

Fifth is cash-flow.  Your basic numbers probably include cash-flow, but this is so important I feel it ought to be kept as an individual point.

Those five points are not a document…. these are things on your computer…. you may have one component in PowerPoint, one in Excel etc.  It’s form follows function.  The plan is the lists, milestones and responsibilities- not the document that describes them.

Q: How has business planning changed over the last decade or more?

[Tim Berry] I feel there has been huge change, and technology is the driver.  The human species is different now to thirty years ago, we have an electronic extension to our DNA that gives so many distractions, so much multi-tasking, and so little time to focus on a single thought for any extended period of time.  Business planning reflects our reality- it’s now quicker… people go in and come out of plans faster… The goal and purpose of plans 30 years ago was enormously descriptive, with research built into the format.  It was used as a management  tool for a large company or a key component of raising money and getting loans.

Now, nobody looks to a business plan as a thesis to prove your knowledge and experience.  A business plan has to be streamlined and efficient- it’s always wrong, always obsolete- but has value in managing the change.

Q: Where do business plans fit within the investment process?

[Tim Berry] I have raised VC money, we’ve bought VC’s out and I’m now the managing member of a local angel investment group.

There’s been a change… the business plan 30 years ago was often the frontwards selling document of a transaction.  Nowadays, everything is more streamlined.  Many deals are rejected before anyone has even read plan.  From what I’ve seen though, no deal actually makes it to term-sheet and close without the plan being read very carefully.  It’s much more of a due-diligence document than introduction now.

Our angel investment group starts the year with around 40 investment possibilities.  We’ll narrow this down to 10-12 by reading only summaries.  In the summaries we look for team-experience in start-ups, interesting growth potential, scalability and defensibility.  The summaries need to show that, and the business plan effectively becomes a detailed agreement between management, entrepreneurs and investors rather than exposing the idea.

In my world, every business needs business planning. The business plan document, in that subset of businesses that have business use for showing a business plan to some outsider such as a bank or an investor is a subset of the total- but in that subset too, the summaries are important- the business plan just sets the milestones, measurable steps and so on.   The business plan is about management not exposition, it shows commitment to milestones.

Q: Are there any common mistakes you see when people are producing their business plan?

[Tim Berry] By far the most common is underestimating expenses.  This happens all the time.  Just the other day, I found someone who listed the average profitability for public companies in about 50 industries.  You saw 8%, 12% and a couple that got into the 20′s.  Real-estate was up in the 60′s… When industries do barely double-digits if their lucky, business plans ought not to be showing EBIT or EBITDA of 50-70% – that doesn’t mean people are smart, it means they haven’t understood the industry.  In rare cases as an investor you will discover opportunities where technology is so good and so new, that it may actually be the case- but that’s one in a million.

Another common mistake is proving-knowledge.  This is a waste of everyone’s time.  Investors will become confident with knowledge by looking at degrees and/or track records- but you don’t need to explain the science to an investor.  Investors want to see what you’re going to do, the milestones, the sales- not a long, windy hard to read plan.

The final one- which I am glad is coming ‘out of fashion’ now is the trend for people to feel they had to be the ‘low cost provider’ in their industry.  That the only successful plan was the one that delivered the product to market at the lowest cost.  This is not the real world- people are getting more sophisticated about the relationship of price to value, and the value proposition.

Looking at the key sections

Q: What are your key tips to making a killer executive summary?

[Tim Berry] Validation really helps…. do you have sales? a term-sheet? a letter of intent?

You only have a few seconds to grab someone’s attention- so marketability, management team, scalability and defensibility all have to show up in the summary.  This is classic journalism- the lead has to come first.  You have to get the sizzle into the summary and get people to want to know more.

Q: What are the keys to a good finance-section?

[Tim Berry] I’m conflicted with this theme because I love the numbers.  I’ve built a company that grew out of making numbers easy to do without sacrificing the basic quality of thought- accrual accounting was important, cash-flow has to reflect inventory turn, collection days and accounts receivable…..

As an investor, I want to see revenue projections that are credible from the bottom up- not top down.  I want to see that business-owners understand the flow through their channels, if it’s web-direct I want to see some sense of how they’re going to acquire the traffic and conversion rates.  I want to see maturity in the cash-flow.  Don’t do a business to business that has no accounts receivable for example.  I want to see maturity in the relationship between the numbers- I don’t want to see gross margins or profits that are 4 times industry average.   If they are different, I want to see the entrepreneurs know about differences and can explain them.

While I like an exit strategy, I hate having to read IRR or NPV or a five-year valuation.  You have compounding uncertainty at that time-frame.  You have to guess profits, sales and multiples- and each of these comes with a magnitude of uncertainty in their own right.  It’s a complete waste of time…  These sorts of calculations are good in academia or in an enterprise situation, but not in the start-up world

Saying that… as an Investor I’ll take a good plan with bad numbers over a mediocre plan with accurate numbers.  The numbers are easier to fix than a poor market or product mix.  Most investors gauge the scale and credibility of the numbers in their own head based on the story the plan tells about the problem, the need and who’s solving it.

Q: What is the key to a strong marketing section?

[Tim Berry] I go for the stories.  I really believe that stories tell the truth.

I want to understand and believe the story of the problem and the solution.  Who has the problem? why is this solution better? how do we connect the people with the problem with the solution that we have?  Segmentation is often the real genius of a successful business- understanding who is in the market and who isn’t.  This understanding of the target user then allows the business to develop the right delivery mechanisms and signalling channels whether that be Facebook or print advertisements.

In a marketing plan, a common mistake is when you see B2B companies that have direct sales potential but don’t have a structure for sales-people, sales management, sales-expenses, decision-time, account management and so on.

Q: What is the key to a strong operational and management section?

[Tim Berry] I deal with this in a similar way to the science, I look for the team members.  I want to see that somebody has been operating in this industry, and understands how it works.  As an investor- most of the plans I see are for industries that I don’t know- and I know what I don’t know.  I’m no more capable of evaluating a small manufacturing enterprise than I am of a PhD science project.  I want to see that the team has someone credible who is in charge of operations.  It’s disappointing when they come from a different industry.

One thing that bothers me in the world of business planning is that advisors appear and disappear with almost callous glibness.  I’ll see a plan where they may have ‘n‘ advisors with industry experience and think, “wow, this is interesting” but I’ll ask what the relationship is.  Are they compensated? do they have stock-options? do they have skin in the game? if the answer is “no, they’re just friends… we like them, they like us, they’re just helping…” I will tend to discount it.  If the advisors have real hooks, then that brings them up.

There are so many plans that have an obvious person missing.  As an investor, I’ll forgive that if the person writing the plan has identified who’s missing.  A hole or two is fine with a start-up.

Q: Why are people so scared of business planning?

[Tim Berry] People are scared of business planning because the myth of ‘the fat business plan‘ still exists.  This is folklore.  There are institutions who are vested in this myth of business planning and that begins with the thousands of people who want to make money writing business plans.  Many banks and supposed experts re-enforce this.   People perpetuate this feeling that you cannot do anything until the business plan is done.  In my world, when the business plan is done… you’re done!  A good business is always changing its business plan.

I knew a guy once who for four years was doing nothing but business plans and his life was going to start when he got financed. In that period he had four business plans, none of which got financed.  It reminds me of the old-folks in Las Vegas who are clearly hurting, hoping to make it all back by throwing quarters in a slot machine.

In my world, you are always doing a business plan, it’s always happening.  For some people this may begin with a sales-forecast, and for others it may be a target market.  Whatever it is, the important thing is to get going! Recognise the fact that you get started, go into it for 10-20 minutes and then go back to selling, watching cash-flow and so on.  Nobody in a start-up should be doing nothing but a business plan, that is time which is totally wasted.

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“We caution that business planning is an insufficient condition for venture success...” write Delmar and Shane, “The content of business plans and the implementation of these plans could have a more important role in influencing disbanding, venture organizing activity, and product development than the simple act of planning… business planning is not the most important factor in influencing disbanding, product development, or venture organizing activity.  Several factors outside the control of the firm founder, most notably the passage of time and the nature of the venture opportunity, appear to explain more variance in these outcomes than does business planning. Nevertheless… the simple act of undertaking business planning matters more for venture disbanding, product development, and venture organizing activity than any other single factor under the control of firm founders that we could identify.” (Strategic Management Journal, 2003)

Their view reveals one of the underlying truths of business planning.  Many people feel that a business plan is a guarantee of a venture’s success- but as management guru Peter F. Drucker notes, “Plans are only good intentions unless they immediately degenerate into hard work.”

It is that component- the hard work, the execution, the journey- that ultimately will make or break a business.  And the business plan acts as a road-map for that journey, giving you a sense of direction and an understanding of your context.  As the mathematician Poincaré allows me to conclude, “It is far better to foresee even without certainty than not to foresee at all.”

In these exclusive interviews, we speak to Moby (Multi Award Winning International Recording Artist, DJ and Photographer) and Hans Zimmer (International Award Winning composer and music producer who has composed music for over 100 films). We discuss the fundamental question of ‘what’ music is and the role of music in human culture. We also explore the business of music, and how technology has impacted the production and consumption of music around the world. Digging deeper, we discuss the secrets of what makes a great piece of music and look at why music is fundamental to our very experience of being human.

http://thoughteconomics.blogspot.co.uk/2013/03/the-role-of-music-in-human-culture.html

In these exclusive interviews, we speak to Michel Sidibé (Executive Director, UNAids), Dr. Stefano Bertozzi (Director of HIV at the Bill & Melinda Gates Foundation), Dr. Gottfried Hirnschall (Director of HIV Department at WHO – World Health Organisation) and Brian West (Chair of the European Aids Treatment Group, who has been living with HIV for over 25 years). We look at the very nature of the virus, its impact on society and culture globally, and discuss the opportunities to move to a world free of HIV/AIDS.

http://thoughteconomics.blogspot.co.uk/2013/02/fighting-hiv-aids-globally.html

An Interview Auschwitz survivor, Iby Knill.

In one of the darkest moments of modern civilisation, over six million Jews were killed by Nazi Germany in a state-sponsored genocide.  This event (The Holocaust) killed over two-thirds of Europe’s entire Jewish population.  The Nazis, in their single-minded belief of German racial superiority, targeted any group they felt as ‘racially or ideologically inferior‘ including  Roma (Gypsies), the disabled, some of the Slavic peoples (Poles, Russians and so on), Socialists, Communists, Jehova’s Witnesses and homosexuals.

Believing that the Jewish people posed the greatest threat to their ideological plans, the Nazi party felt a systematic eradication of all Jewish people was the ‘Final Solution‘ to the ‘Jewish Problem‘.  As Henrich Himmler was quoted as saying, “I may here in this closest of circles allude to a question which you… which has become for me the most difficult question of my life, the Jewish question.. I have resolved even here on a completely clear solution… The difficult decision had to be taken, to cause this people to disappear from the earth.”

The level of dehumanisation witnessed in Nazi extermination camps during was staggering.  Killing was indiscriminate for those whom the party felt they had no use for, and many people were even used for human “medical” experiments.  the account of one Jewish inmate at Auschwitz (Vera Alexander) recalls, “…I remember one set of twins in particular: Guido and Ina, aged about four. One day, Mengele took them away. When they returned, they were in a terrible state: they had been sewn together, back to back, like Siamese twins. Their wounds were infected and oozing pus. They screamed day and night. Then their parents—I remember the mother’s name was Stella—managed to get some morphine and they killed the children in order to end their suffering….”

it took decades for the Jewish people and the rest of the world to recover from World War II, and for most of us- it is impossible to imagine how the very few survivors of such atrocities could rebuild their lives, but some did. To learn more, I spoke with Iby Knill who- as a teenager- survived Auschwitz.

During her childhood in Czechoslovakia, Iby’s parents – alarmed at the persecution of Jews in Germany – smuggled her over the border to Hungary.  She was caught by the security police and then imprisoned and tortured, not only as a result of her Jewish connections but for having entered Hungary illegally and for aiding the resistance movement. Eventually, Iby was sent to the infamous Auschwitz-Birkenau camp.  In June 1944, Iby Knill left Auschwitz-Birkenau by volunteering to travel as a nurse with a slave labour transport of 500 women. Once transported to Lippstadt, she was put in charge of a hospital unit and risked her life protecting the weak and helpless from the gas chambers.

After decades of silence, Iby recounted her experiences in her book “The Woman Without a Number“

Q: What did you recall about the outbreak of war, and when did you realise the severity of the conflict?

 [Iby Knill] It goes back to Spring 1938, when Hitler occupied Austria in the Anschluss.  My father had relatives in England, and he and I were on the point of going to England when the Anschluss happened and we couldn’t go, and we were stuck in Slovakia.

The result of the Anschluss was that Czechoslovakia mobilised and- at that time- the army were on bicycles not in tanks!   All of the bicycle manufacturers were in the Sudetenland, and those factories refused to supply the government with bicycles directly for their mobilisation!  I can remember quite vividly that my father arranged a huge quantity of bicycles from the Sudetenland, and then- as a business- sold them to the government for their mobilisation.  The particular reason I remember is that all the bicycles had to be black, and not have any shiny surfaces.  That’s what I remember about how things started!

Next came the horror of the occupation of what is now the Czech Republic, and the creation of the puppet-state of Slovakia- which shook us to the core.

At the time I was only 12-14 years old, and at that age- you don’t take note of politics as such.  Also, you don’t have the same communication systems.  You didn’t have mobile phones, television and so on- and not everyone looked at newspapers.  Radio gave concerts and plays, not news.  The amount of information of what was going on was minimal.

Q: What do you recall about the events that led to your arrival at Auschwitz, and did you know about Auschwitz before then?

[Iby Knill] We heard of camps but I certainly didn’t realise what the implications were.

We [Jews] were told that after the age of 16 you should no longer have any intellectual pursuits and that you shouldn’t go to school any more- so our education was interrupted.  The Nuremberg Laws also enforced a curfew from 8pm to 6am.  We [Jews] weren’t allowed to sit down on public transport or park benches because they thought we would contaminate them.  We couldn’t go to any places of public entertainment, and we had to wear the yellow star.

My family was not religious, and so I hadn’t realised that we were Jewish! As a young girl, I was angry… I thought it was very unfair.  I didn’t think we were any different, and was angry that we were being treated differently.

When we were told to leave school, we were then told to learn a practical trade.  As a girl in the 1930s as a girl what was I going to learn as a practical trade? I was not going to become a bricklayer or a plasterer, so I took a course in graphic design! This actually worked out rather well as eventually in England I had a successful design business- so no learning is ever wasted from that point of view!

When the German soldiers came, we had to leave our apartment as we were in the area- near the Embassies- where the Germans wanted to live.  They allocated us a one bedroom apartment on the outskirts of town.  We obviously couldn’t take most of our possessions.  At the time we had maids and cooks who came from one particular village.  When they got married, their children or relatives came- it was a family progression.  One of our maids who got married… her husband came with a horse and cart and loaded up all our furniture.  My mother, with much forethought, filled a suitcase with photos and personal items and hid it in a barn on a farm, behind bales of straw and other such things.  We got all of that back after the war.

This all took place in the winter of 1941.  In February 1942, I escaped over the border into Hungary because they were rounding up the Jewish girls.  I was hidden first by my cousin, and then after he was called up by the Hungarian army- I was hidden by the Marky family.  We tried to escape via the routes used by air-crew who were shot down and unfortunately we got caught.  There were 428 of us who got arrested.  They interrogated us at the police station, and I ended up with a 3 month sentence at the Women’s Prison in Budapest.  When they released me I was re-arrested as an illegal immigrant and sent to a detention centre, an immigration centre, and eventually a refugee camp in Northern Hungary.  When you were arrested as an illegal immigrant, you were classed as a political prisoner and released on parole. This happened to me in March 1944.

On the evening of D-Day, there was blanket bombardment- probably to divert the attention of Germans.  They had never anticipated air-raids in Hungary, so we had no trenches or shelters.  People were told to stay in their homes and not to go out.  During that night lorries drove up with German Einsatzgruppen, accompanied by the Hungarian police, and rounded up all the Jewish people in the area.  They rounded up about 3,000 people- I had just been visiting there and so was at the wrong place at the wrong time.   I finished up at a brickyard, and from there we were taken to Auschwitz Birkenau.  We left of the 12th of June and arrived in Auschwitz on the 17th of June.

Q: What are your key memories of Auschwitz?

[Iby Knill] I remember the back of the lorry being pulled open, and being told to leave.  They said that they were taking the old and ill people to a hospital, and everyone else had to get out- men to the right, women to the left.  There were five of us women including two doctors.  We jumped out, linked arms and- I know it sounds crazy- but we sang the Hungarian national anthem.  At the time we thought [in a sick way] that it was funny.  We were then shown the door into Auschwitz Birkenau.

I remember that we were told to strip and stand on little stools.  All the hair on our body was shaven off and around the room SS men and women were laughing and joking at us.  It was frightfully degrading, and was our first glimpse at being dehumanised.  You were not treated as a person- but rather as a thing.  They made you feel that you weren’t a person, but rather- to all intents and purposes- that you were a sheep being herded.

We came to realise- pretty soon- the real purpose of that place [Auschwitz].  First of all, the smell of the place… the smell of burning flesh…. it stays with you forever.  It may sound strange, but to this day I don’t particularly like barbecues as a result…  The smell was there all the time, it stays with you.  Smells are very evocative, and remind you of things very much.

We were quickly made aware of what was going on.  We were told that if you didn’t stand up straight, and if you didn’t look fit, you were just taken away and never seen again.  The gas chambers and crematorium were smoking continuously.  Thousands and thousands of people from Hungary were being brought there at an incredible rate.

Somewhere along the line, we were each given a number.  There were so many of us, it was the only way they could keep track.  The machinery broke, and I was not given a number.  Mine should have been 75,245.

Q: How did you feel towards your captors, and those involved in running Auschwitz?

[Iby Knill] The huts themselves were run by Capos (trustees).  Fortunately I was a linguist, and the Capo in the hut that I was were Czech and I could communicate with them. All the others in the hut were Hungarian and could not speak any other language.  At this stage, you just thought of survival- the five of us stayed together, and because I could communicate I got maybe a little more soup than other people- a blanket that was slightly bigger.  Because I could speak German, I could also communicate with the Germans, which was also an advantage.  Being able to communicate with people was an advantage, and you took advantage of that fact to survive.  Your only aim in life at that stage was to live one day longer.

We knew that the D-Day landing had taken place, and we were hoping it would not be that long before the Allies won the war and we would be liberated.  We were now in June 1944, quite a way into the war- and close to the end.  We were holding on and trying to survive.

Q: Did your experiences at Auschwitz change your views of death?

[Iby Knill] I honestly don’t know.

We were simply concerned with the moment, just surviving one day at a time.  We could only live for today… there was nothing you could do about yesterday, and tomorrow may not exist. You were living in the here and now.  It’s a state of mind that stayed with me.  You can only deal with things as they are now.

Q: What did your experiences at Auschwitz teach you?

[Iby Knill] The most prominent lesson was that there is only today.

You have to live for today and make the best of today.  Maybe at the end of the day you will feel like you have not hurt or damaged anyone or even that you have done some good.  It’s been the lesson by which I have lived the rest of my life.

You can plan for the future, but not anticipate it.  In reality there is only today, nothing else.

Q: Did your experiences at Auschwitz change your sense of identity?

[Iby Knill] Initially, after the liberation- everyone felt survivors guilt.  Why did we survive when others didn’t? What do we now have to do in order to earn and deserve the fact that were still alive? This is common with survivors, and colours the way you look at life and your own actions.  You evaluate things on that basis- and you try to be a better person.  You try not to harm person… and try to not damage or belittle others, because you have experienced yourself what it is to be belittled.

I had a nervous breakdown for the first three years.  Had it not been for a very understanding husband, I don’t think I would have survived.  My late husband had been a soldier in the First World War and experienced trench warfare.  He understood the trauma of what I was going through.

It took several more years to get some form of balanced mental state.  I wrapped up those memories into a Pandora’s box, threw it in the sea and threw away the key.  I would never talk about it or refer to it, nor would my mother who had also been in a camp.  We would never mention to each other- anything about it.  You pretended that period of time never existed.

During my time in Auschwitz, it was impossible to isolate good from bad- and so that period disappeared.  To the extent that for those years afterwards, I could not speak German- which had previously been my main language.  It is only now- since 2002 when I started my book- that I concluded that it was time to put down what I had experienced, and bear witness to it.

Q: What was the importance of sharing the stories of Auschwitz, and what can society learn from your experiences?

[Iby Knill] It’s very important for people to realise that you mustn’t allow a culture of us and them to develop.

When you look at young people- they play together regardless of their colour or background.  Somewhere along the line they start to feel that other people are different to them.  I’m not saying we should all revert to childlike innocence, but rather that this feeling of equality should remain… that we feel that under the skin, we are all the same…

I find it very important to talk to young people about it, and make them aware what the end result can be of this sort of culture of dehumanisation can be.  I spend a lot of time talking to young people about the fact that people being different only makes life more interesting, and more valuable.  It would be very dull if we were all the same.

Q: Do you think the messages from Auschwitz could prevent such a horror from occurring again?

[Iby Knill] Here’s hoping!

Unless young people get actively engaged in treating people as they wish to be treated themselves, it’s a very dark outlook for mankind.  If we aren’t careful, we will destroy mankind.. I find it very frightening…

———

Faced with unbelievable circumstances, Iby survived- and she courageously now shares her story in the hope that society may learn from, and never repeat the mistakes of the past.  Mistakes which- in the twentieth century alone- have claimed the lives of almost 80 million people in acts of Genocide and mass murder.

The hypocrisy of our species’ notional morality is such that we define ourselves as a civilisation while millions of us are arbitrarily slaughtered by our own hands.  It is human culture that allows these crimes to take place, and it is human culture that will prevent them from happening again.  It was humanity that uttered the words “never again” before watching as 20% of the Rwandan population (c.1 million people) were exterminated in 1994.

Iby is right that we must get children engaged in breaking the processes that allow society to train them into believing that people are different because of their race, gender or beliefs.

Each and every day, 350,000 new souls enter the world- opening their eyes for the first time as blank canvas’ for culture to form.  The outcomes of that generation are the legacy of ours, and with that in mind we must take responsibility for the fact that if we are engrossed in discrimination- so too will they be.

Iby notes that, “...If we aren’t careful, we will destroy mankind..”

…only mankind can stop that happening.

Guest article written for AllAboutAlpha.com – the official publication of the Chartered Alternative Investment Analyst (CAIA) Association

Originally posted at: http://allaboutalpha.com/blog/2013/01/27/a-look-at-the-world-diamond-market/

Diamond’s are one of the world’s most precious natural resources.  These unique stones are almost as old as the Earth itself, and have become culturally, socially, economically, politically and even  scientifically significant.  Figures from the World Diamond Council state that each year, around US$13 billion of rough-diamonds are mined (65% of which come from Africa).  The diamond value chain (from exploration, to mining, processing and retail) employs over 10 million people around the world, and jewellery sales alone (having grown three-fold in 25 years) are now in excess of US$72 billion per annum.

The diamond industry has always existed in a state of pseudo globalisation.  Over a thousand years ago, diamonds were mined in India, before being cut and polished in Arabia and sold to European aristocracy.  These are stones which have been adored for their rarity and beauty, while being almost universally accepted as portable, untraceable and efficient stores of value.   The diamond ‘industry‘ (at least as we know it today) began 1800′s, when an accidental find of diamonds in South Africa kicked off a mining, exploration and trading boom that led to the existence of one of the most successful and long-lasting cartel’s in economic history- that being the small network of world diamond producers.

The relative opacity and complexity of the diamond market has contributed to a general lack of understanding of its dynamics when, in truth, the modern form of globalisation has introduced competition, transparency and free-market behaviours to this industry.

To learn more about the world diamond market, I spoke to David Prager, Global Head of Corporate Affairs at De Beers Group – a 120 year old firm with revenues of over US$7 billion, and a market share (by value) of over 35% of the world’s rough diamond market.

Q: Why are diamonds important?

[David Prager] The truth is nobody needs a diamond.  You don’t need a diamond to heat your home, run your car or power your cell-phone.  As a business, it’s clear to us that there is only one source of value for diamonds- and that is the consumer’s desire for the product.  99% of diamond demand is from the jewellery industry, less than 1% goes to industrial uses.  For that 99%, diamonds represent a cultural phenomenon.  They signify all the values that people recognise as being attributable to the stone- love, commitment, marriage, relationship, the birth of a child, accomplishment and so on.  More than just being a luxury item, they are pieces that represent milestone moments- that’s why they’re important.

People also reflect on whether diamonds are a hard asset class.  They are the hardest of all assets, being the hardest asset known to man!  Diamonds are rare, there haven’t been any major finds for over 20years, and there are no major mines on the horizon.  Demand- particularly in China and India- is growing rapidly, and in the very near future we will see demand outpace plateauing supply.  That means that people have a product that not only represents important life moments, but which will be worth more in the future than it is today- and will always increase in value.

Q: Who are the key participants (and countries) in the diamond market?

[David Prager] In the mining side of the market, de Beers is the largest miner by value.  In many sectors you talk about volume (such as carats), but in diamonds it’s the value of the product that is crucial as every diamond is different.  De Beers has around 35% of the market by value, and mines in 4 countries- Botswana by far being the largest producer, but also South Africa, Namibia and Canada.  We are also currently exploring sites in Angola and India.  The mining countries that are big are Botswana, Russia, South Africa and Canada.

In terms of the mid-stream manufacturing sector where rough diamonds are cut, polished and sent to jewellery- the large part of that value chain sits in India.  China, Tel Aviv, Antwerp (Belgium) and the United States are also significant – and each specialise in a different type of diamond.

Botswana is a very large producer of diamonds, and as part of our 10 year agreement to mine and sell those diamonds through De Beers, we have agreed to move our diamond sales operations, in their entirety- from all our mines around the world to Botswana (by the end of 2013).   All of our clients (site-holders) will therefore be coming to our diamond sales in Botswana 10 times a year.  Overnight, Botswana will go from being a large producer of diamonds to also being a key purchasing and trading centre.

Q: What are the key demand drivers in the diamond market?

[David Prager] If we look at gem-diamonds (99% of the market)- the bridal category (wedding and engagement rings) are the leading segment in the United States and China, accounting for around one third to a half of all sales.  In India and Japan you see a more balanced demand across all jewellery categories, not just diamonds.

In terms of the diamonds themselves- Americans tend to look for larger stones, falling between 0.5-1 carat, but of slightly lower quality.  In China and Japan, around a third of sales are between 0.18 and 0.5 carat but of a higher quality.  India is a smalls market, with much smaller stones albeit at a better quality.

Q: What is the state of the market for synthetic diamonds, and how does that impact natural stone sales?

[David Prager] If you are talking of the use of synthetic diamonds in industrial (super-material) applications, the market is very exciting.  De Beers own a company called Element 6 (Carbon being the 6th element in the periodic table).  In the industrial space, you may find Element 6 diamonds on the tip of a drill or road-pick helping productivity, as they wear out far less than a normal drill bit.  You may also find these diamonds in the high-tech space in semiconductors (as they dissipate heat very effectively) or as ultra-thin diamond windows for lasers.  There are many tremendously exciting applications, and we’re only seeing the beginning of them.

In the gem-space, there are a few companies marketing synthetics.  The first thing to note is that the production of synthetic diamonds is very difficult to do at a good quality and manufacturers must disclose their stones are man-made and not natural.  All the market research we have done shows that consumers use diamonds to mark special moments in their lives because they are timeless, have been in the ground 3 billion years and are unique.  For all of those reasons, when you ask a consumer, particularly a woman, if they would be happy to have a synthetic diamond engagement ring? the answer is no…

Q: What are the risks to the world diamond market?

[David Prager] Rather than large-finds and so forth, the big risk comes from global economic volatility that can impact demand. Geopolitical risk is also important- De Beers have been extraordinarily fortunate to work in countries that have good records and history of governance, and use their profits from diamonds well.  In Botswana and Namibia for example, we are in full 50:50 joint venture partnerships to mine diamonds.  It creates an equitable partnership where both parties are able to meet their expectations.  It’s important to note that geopolitical risk and volatility don’t worry us from an operational perspective per-say, but more in terms of how they will impact the global banking system and consumer demand.

Q: What is the role of ethics and responsibility in the diamond market?

[David Prager] It’s hugely important.  As I said earlier, the only source of value in our business is the consumer’s desire for the product.  That desire is built on emotions ascribed to diamonds, and if they believe they believe the way that diamond has been brought to their finger (the mine to finger journey) does anything other than live up to the values they ascribe to it, we would have a major problem.  Your entire commercial model is then at risk.  We do a lot of work, and invest a lot of money, people and time to evaluate our supply chain.  We also audit and monitor the supply chain after we sell diamonds.  Our clients are only allowed to purchase from us if they meet our best practice principles, which are independently audited- and cover everything from abiding by the kimberley process to their environmental, labour and other policies.

Not only is bringing diamonds to market ethically the right thing to do, but it also sits at the very core of our commercial strategy.

Q: What are the key future opportunities for investors and participants in the diamond market?

[David Prager] Just from a gem-opportunity standpoint, China and India hold remarkable potential.  We estimate that between 2010 and 2015, there will be 150million new Chinese entering the middle-class.  That’s a middle-class which increasingly buys diamonds as a gift of love and as a memento of stature.

De Beers also have some exciting technology in mining and sorting, but the biggest opportunity by far is on the luxury side in China and India.

What does this mean for investors and risk managers?

As Mr. Prager identifies, diamonds are fairly unique as a mined commodity- having (in the main) no real intrinsic value or use other than that which is culturally and socially applied.

The diamond market however is one filled with interesting investment opportunities.  Demand for the product is outstripping demand, and we are also now seeing many new entrants, technological advances and demand changes that create profit opportunities for investors.

For risk managers, increased transparency within the market can only be a good thing- bringing better price discovery, liquidity and more considered understanding of the firms that participate. Analysis is also revealing that rather than being immune to market movements, diamonds themselves are- like anything- impacted by currency, inflation, interest rates and other drivers of market sentiment.

…and as Anglo American’s acquisition of 45% of De Beers of US$5.1 billion in 2012 shows, this glass with attitude has certainly not lost its sparkle

In this exclusive interview, we speak to Sir Richard Branson (Founder of Virgin Group). We discuss the fundamental nature of entrepreneurship, entrepreneurs themselves, and the role of entrepreneurs in society and the economy. We look at the key sources of entrepreneurial ideas, characteristics of successful enterprise and the role of wealth in the entrepreneurial journey. We also look at how entrepreneurship has changed, what the future holds and how entrepreneurs are addressing some of the world’s most pressing problems from poverty and economic crises to climate change and health.

http://thoughteconomics.blogspot.co.uk/2013/01/entrepreneurship.html

Guest article written for AllAboutAlpha.com – the official publication of the Chartered Alternative Investment Analyst (CAIA) Association

Originally posted at: http://allaboutalpha.com/blog/2012/12/20/managing-risk-in-fixed-income-markets/

At any given time, almost US$100 trillion is outstanding on the global bond market.  This is roughly twice the size of the world’s equity markets combined, amounting to almost 150% of global GDP.  Bonds and other fixed-income instruments are the foundation of how much of the world’s economy is funded.

From central banks to financial institutions, insurers and more- everyone has their eyes firmly glued to even the most minute movements in these markets.  James Carville (former political advisor to President Clinton) once said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody…”

The very word “bond” conjures up an idea of how these instruments were perceived in the market.  Bonds were typically seen as being the ultimate safe-haven instruments for a portfolio, but following the near-existential events of 2007 have showed investors otherwise.  Research shows that, “…Collateralized debt obligations (CDOs), once a money making machine on Wall Street, have been responsible for $542 billion of the nearly trillion dollars in losses suffered by financial institutions since 2007…” By magnitude, this would be similar to losing the entire Deutsche Börse.

To learn more about managing risk in fixed income portfolios, I spoke to Dr. Kevin Anderson, Global CIO (Fixed Income and Currency) at SSgA (State Street Global Advisors) – a firm with  US$23.4 trillion in assets under custody and administration, and US$2.1 trillion  under management. 

Kevin is a Senior Managing Director of SSgA and Global CIO of Fixed Income and Currency. He is responsible for all fixed income and currency strategies and products.  Kevin holds a PhD in Theoretical Physics from the University of Southampton and he graduated with a BSc Honours degree in Mathematical Physics from the University of Edinburgh in 1994.

Q: What are the key risks and mitigation strategies in government and other sovereign debt?

[Dr. Kevin Anderson] Before we make an investment and look at risks, we have to look at what our clients want in terms of investment outcomes and their own risk profiles.  Linking that to government bonds and the treasury curve for example, we see that pension fund clients will have long-dated liabilities and potentially will need to match longer-duration.  They have a different risk-profile to short-dated insurance or other participants.  It’s important to look at the risk of the instrument and investment in context of client’s needs and strategies.  Before you think about the alpha, you have to think about the client’s beta.

We hold government debt for principally for those classes of client- defined benefit pension funds, institutions such as central banks, insurance firms and so on.  Assessing the interest rate risk is still the key when looking at the full or partial duration of those instruments.

If we look at sovereign paper, recent experiences in Europe have illustrated the creation of the ‘sovereign risk premium‘.  Investors who previously thought that sovereigns were a quasi-risk-free asset have been challenged in that respect.  Domestic local-currency sovereign debt is certainly not risk-free.  It very much depends on the willingness and ability of the sovereign to pay-back its debt!  Sovereign debt is reasonably unique in that there are no underlying assets one can claim unlike corporate bonds.  Assessing that idiosyncratic risk premium is very important.  For example, in our more alpha-focussed mandates, research has been directed at assessing risk between the fundamentals between euro zone states.

Q: What are the key risks and mitigation strategies in corporate debt?

[Dr. Kevin Anderson] Corporate bonds have additional risk factors.  You have the underlying rate-profile and the position of that issue from a particular issuer on the yield curve, and how that impacts the interest-rate profile.  However, there are a number of other factors one should consider.

We are certainly taking a view on a sector basis, with utilities, industrials and financials at the top-most level.  Looking down beneath that, we will see banks, brokerage, insurance, different types of utility companies, autos and so forth.  Those sector-based calls are important from a macro and cyclical sense.  Understanding your relative exposure to those macro factors is important.

Another important element is the idiosyncratic risk profile of the issuer.  A corporate bond is ultimate a long-term loan structured in the form of a bond.  Corporate entities are not default-remote and are not guaranteed to pay-back their debts.  You have to look at the balance sheets of the corporates in your portfolio, and understand how that balance sheet looks from a bond-holder perspective rather than a shareholder perspective.  This can introduce in macro  considerations such as concentration, sectoral risk.

Liquidity in corporate bond markets has been challenging this year.  Many large trading bank models are trading, and flow-trading has been transformed.    Ongoing regulatory changes aiming to increase transparency will also create changes in this market.

Q: What are your views on the risks presented by CD instruments?

[Dr. Kevin Anderson] Key is to recognise who the issuer of the deposit is.  At SSGA we manage traditional bond portfolios (typically over 1 year to maturity) and also have significant cash business.  Here, we manage portfolios that look to provide market value cash or liquidity.  It’s incredibly important to understand the credit-worthiness of the investments, the issuer’s own status and so on.

Q: What are your views on the risks presented by MBS, CDO and other fixed-income derivatives?

[Dr. Kevin Anderson] Securities like MBS have a prepayment risk in their profile.  There is always the ability for mortgage owners- who are ultimately behind the instrument- to refinance and prepay their mortgages.  This gives mortgages a convexity risk feature which is different to most securities in issue.  This has to be assessed against interest rate volatility as it can affect not just risk, but also alpha.

When one talks about MBS, CDO, ABS- all of those are part of a rich and expansive set of securities.  MBS includes the Ginnie Mae issues in the US, agency mortgage-backs (which are exclusive guaranteed by the US Government) and Fannie Mae & Freddie Mac which are implicitly guaranteed.  In totality, those mortgage-backed pools of issuance account for approximately one fifth or so of the whole US investment grade bond market.  They are a significant part of many US Dollar investor exposures, especially if they are buying in aggregate.

When one looks at ABS, there is more of an issuer-profile to take into account as well as an interest-rate differentiation profile given the type of cash-flow the instrument may generate over its term.  You also have to look at the underlying pools of assets and collateral backing the issue.  These risks must be compensated for in the price.

Transparency is paramount.  We have to make sure that we have sufficient transparency in the investments we are making, to be able to manage risk for our clients.  CDOs and tranches thereof are certainly not part of mainstream institutional investor portfolios- mainly because of the risk-preferences of clients, and our own specialisations.  These are specialised and complex instruments.  We have seen a continued push for drive from our investors, especially since central-bank interventions in markets have pushed yields lower.  We still have short-term memory of the financial crisis and are nowhere near the stage where investors would look for yield ‘at any cost‘.   Investors have therefore moved away from instruments with a lack of transparency.

Q: What are your views on the risks presented by high-yield and non-investment grade instruments?

[Dr. Kevin Anderson] We invest in high-yield both in the European and US markets.  One of our very large Exchange Traded Funds is a US High Yield product, we’re there buying the market!

When one buys an ETF in fixed-income, one cannot replicate every issue in the market and so one must look carefully at the risks involved.  The assessment of risk in terms of high-yield has additional dimensions.  You have sectoral risk, the nature of the issuer, idiosyncratic risks due to the companies themselves and more.

The other risks are due to covenants.  For example, there are a fair percentage of these instruments which are callable bonds.  These present the risk where an investor could call the bonds back with a value of 100 if they reach a price over-par.  Given the current rally in high-yield, there is a significantly greater call-risk in the market.  Bonds are behaving with a slightly different convexity- giving a negative convexity rather than others in the market.

Q: What are your views on the environment for price discovery and rating for fixed-income instruments and portfolios?

[Dr. Kevin Anderson] Price discovery is a function of the execution venues that one has, and which determine the price at which the market is willing to buy and sell.  In equities this is somewhat straightforward, given that they are traded on exchanges- and those exchanges are an important source of price-discovery and liquidity.  The fixed-income market (with the exception of fixed-income futures and derivatives) are primarily traded OTC or between counterparts- the main players being large regional and global banks.  The price discovery process in an OTC market is somewhat more challenging than equity markets.  There may not be the same availability of pricing at any given time.  There have been developments, principally around electronic trading networks.  These have significantly improved price-visibility.  We do a substantial volume of our trading across these networks and find they allow for substantially better discovery of pricing.  Our aim being to get best-execution for our clients.

Looking at ratings… Although we have our own team of research analysts to do fundamental analysis of credits and corporates, they also determine- with our portfolio managers- the relative value between issuers.  Rating agencies are a very prevalent part of the landscape, and pay an important role.  They provide an additional source of analysis.  These agencies should make sure they are operating with transparent business models, and with mechanisms to ensure their research is objective and can be independently assessed.  In the mid-80′s there were a greater number of smaller ratings agencies.  Significant consolidation followed, and now we have a small number of dominant agencies.  Post-crisis a number of new agencies have emerged.  I think this greater-number will help increase transparency- as long as quality is maintained.  There are also regulatory changes coming on board in respect of ratings.  It’s important these changes continue to allow a common platform to be understood, and still allow for a high quality of analysis and research to be conducted.

One of the important aspects of rating agencies that we shouldn’t ignore is that many indexes and benchmarks have rules determined by ratings.  You may have an investment grade benchmark, which may mean you are not allowed to own high-yield.  This determination of an investment grade benchmark is not made by our own research analysts, but an independent rating agencies or a group of them together.  Rating agency output is still very prevalent in many types of financial contracts.

What does this mean for investors and risk managers?

Investors in equities and other asset classes are frequently kept on their toes with major events  ranging from frauds such as Madoff (with an impact potentially over $50 billion) to collapses such as Lehman  (who collapsed with assets of US$691 billion), WaMu (who collapsed with assets of US$327 billion) and Worldcom (who collapsed with assets of just over US$100 billion).  Even investors in commodities have to face real-time geopolitical and climate uncertainty.

The bond market has long been the elephant in the room, and events in the financial markets since 2007 (including the European sovereign debt crisis, QE and recent LIBOR scandal) have shown that investors and risk managers need to carefully understand the risks these instruments carry.

On December 14th 2012 Newtown, Connecticut- a small town with just 27,000 residents- became the scene of one of the most horrific mass-murders in modern US history.  A lone gunman first took his own mother’s life, before brutally taking the lives of 20 children and 7 adults at Sandy Hook Elementary School.

As the US magazine ‘Mother Jones’ note, “…it’s perhaps too easy to forget how many times this has happened. The horrific mass murder at a movie theatre in Colorado on July 20, another at a Sikh temple in Wisconsin on August 5, another at a manufacturer in Minneapolis on September 27—and now the unthinkable nightmare at a Connecticut elementary school on December 14…. Since 1982, there have been at least 62 mass murders carried out with firearms across the country…“

New York Times journalist Nicholas Kristof also added that “…more Americans died in gun homicides and suicides in six months than have died in the last 25 years in every terrorist attack and the wars in Afghanistan and Iraq combined…“

A horrified world shared the grief of the families of Newtown and in an emotional address, President Obama asked the people of the United States whether “…as a nation, …we’re meeting our obligations? Can we honestly say that we’re doing enough to keep our children, all of them, safe from harm?…” He was forced to state the obvious noting that, “…if we’re honest with ourselves, the answer’s no. We’re not doing enough. And we will have to change…“

Enshrining Killing into Law…

Whether in defence or aggression, the ‘gun‘ has no other purpose than to cause harm.  It is one of mankind’s most ‘effective‘ enhancements- allowing us to supersede our biological weakness and kill efficiently, and in large numbers.

Such is the weight of importance given to this capability that countries such as the United States have enshrined the right to keep and bear arms into documents which set-out the fundamental rights of all citizens.  The second amendment to the US bill of rights (laid out in 1792) was designed for a different time, where the United States (and other countries) faced endemic mass-violence and pseudo-anarchy with a combination of slavery and the fight between conquerors and indigenous peoples.   As Jeff. D. Sachs points out however, “…since citizens’ militias are anachronistic, gun owners now use the second amendment merely to defend individual gun ownership, as if that somehow offers protection against tyranny. A reckless, right-wing Supreme Court has agreed with them. As a result, gun ownership has become perversely linked to freedom in the vast gun-owning American sub-culture.  But, instead of protection of freedom, Americans nowadays are getting massive bloodshed and fear….”

The Ideological Weapon of Choice…

The Joint Staff ’s DOD Dictionary of Military and Associated Terms describes Weapons of Mass Destruction as being, “…capable of a high order of destruction or causing mass casualties..” the definition also specifically excludes, “the means of transporting or propelling the weapon where such means is a separable and divisible part from the weapon.“

It would not be a great stretch of the imagination to see that guns are “ capable of a high order of destruction or causing mass casualties” while humans are clearly “the means of transporting or propelling the weapon where such means is a separable and divisible part from the weapon..”

While democracy in theory gives“…government by the whole population or all the eligible members of a state, typically through elected representatives…” the reality is that most democracies give government by the groups of a population who carry the most ideological weight.

This creates laughable real-life situations where (as Nicholas Kristof points out) “…we even regulate toy guns, by requiring orange tips — but lawmakers don’t have the gumption to stand up to National Rifle Association extremists and regulate real guns as carefully as we do toys….“

It also creates environments where people (through a perverse example of groupthink) genuinely believe that guns make them safer.  US Congressman Louie Gohmert stated in an interview with Fox News less than 24 hours after the massacre that he, “…wish[ed] to God she [the murdered Principal Dawn Hochsprung] had had an M-4 [US Military grade assault rifle] in her office, locked up so when she heard gunfire, she pulls it out … and takes him [the killer] out and takes his head off before he can kill those precious kids...

It’s time to realise that Weapons of Mass Destruction come in all sizes.  They don’t need to take the form of a single iconic bomb, they can be diffuse.   The ideology of gun ownership combined with its physical manifestation in the form of the gun itself creates a weapon that kills almost 30,000 Americans each and every year.

The horror of this situation is justified, but now is the time to act.  As Noam Chomsky states in his book ‘Understanding Power‘, “The people in the advanced countries now face a choice: we can express justified horror, or we can seek to understand what may have led to the crimes.  If we refuse to do the latter, we will be contributing to the likelihood that much worse lies ahead“