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Alternative Strategies - A year away from the City - June

Patrick HealyI hope, if I have any Bolivian readers, that they will not be too offended if I say that La Paz is a bit of a dump.  Without getting too actuarial about it, my assumption is that I am on pretty safe ground in risking offence to Bolivians.

Bolivia is not short of excuses as to why its main city is not the Florence of South America, being poor in both global and regional terms but, as far as I could see, one the of the main causes of its ugliness is the application of the global law of unintended consequences.

One of the major contributing factors to the unprepossessing appearance of much of La Paz relates, as far as I can tell, from a property law that exempts properties from certain taxes while they are still in the process of construction.  Needless to say, in a poor country where impoverished but canny people are trying to make ends meet, the law has created a situation where everything is in the process of construction.  Central La Paz and its more prosperous areas are in a valley and the poorer hillsides all around are littered with buildings that give the impression that if it would just take one last push to get them finished.  There are piles of cheap hollow red blocks and sheets of heavy blue plastic everywhere.  Not a treat to look at but clearly a sensible economic choice for the homeowners.

In the financial sector we have our own issues with the ugly unintended consequences of legislation and seem on track for yet more, as the momentum builds for the traditional closing of the stable door in honour of our long departed horse.  Many of the unintended consequences of the last laws were exploited to the full by canny but generally not particularly impoverished bankers and fund managers and much of the new legislation working its way through the EU seems designed to punish them rather than to rectify systematic issues with our financial structures.  A cynical person might be tempted to say that this is because it is easier to proclaim villains and to be seen to punish them than to actually try to fix the difficult problems that led to crisis, most of which relate not to sinister and mysterious hedge funds but to bad practices by large retail institutions.

Photograph by Lucy Reeve.

I suspect that the unintended consequence for my own patch is that many in what is currently London’s very successful hedge fund and private equity sector will have views of Swiss lakes from their office windows rather than views of City or Mayfair traffic.  I am sure that the clean mountain air and favourable personal tax rates will reconcile many of them to life away from the metropolis.

“Oh, Agent Starling, you think that you can dissect me with this blunt little tool?”

As well as the obvious pleasure of splitting the world into ‘goodies’ and ‘baddies’ the second sin of the EU legislation is that of oversimplification; a perception that the world can be reduced to discrete, mechanical, logical structures.  I fear that there has been an element of this in the professional discipline of risk management and much of this is the unintended consequence of the success in the use of statistical measures of risk analysis for large homogenous data sets e.g. credit default risk for credit card debt or the market risk impacts on large portfolios of major events.  A cadre of risk managers has moved forward with at least a subconscious view that risk is reliably measurable and those risks for which reliable measures cannot be found are in some way intrinsically less important.

I had the deep misfortune earlier in my career to work in the vicinity of a project that attempted to apply a mechanical computational risk evaluation model to a diverse and amorphous population of operational risks.  The consequences were gruesome, grim and ghastly and no-one in any way connected with the project came away untainted.  The truth was that the risks were not well defined, that in many cases they could not be well defined and the financial impacts were unpredictable and unknowable in the strictest sense of those terms.  This perversity was compounded when the system was combined with a risk capital charging process that had the effect of rewarding managers for under-reporting their risks and penalising those that were attempting to identify a comprehensive picture of their risk concerns.  The project was ultimately buried, unloved and unmourned, and those most closely associated with it were offered opportunities to search for more suitable employment elsewhere.  Those of us who remained looked like fools for having let it go on so long and the credibility of a central risk management function within that organisation took a battering.  I wince even to think about it.

Photograph by Lucy Reeve.

To more enjoyable things.  It has been a busy month of travel - Chile, Bolivia and now Peru.  The last couple of weeks have been spent above 3,500m and the almost unbelievable clarity of the air almost makes up for the shortage of it, which is particularly noticeable whenever you have to climb anywhere (this happens a lot in the Andes).  Chile was an interesting set of contrasts; from the anarchic urbanity of Valparaiso and the slick sophistication of its surrounding vineyards, to the geysers, hot pools and sandboarding near San Pedro de Atacama.  Having complained about the ugliness of urban Bolivia I can unreservedly praise the beauty of the rest of the country.  We came in across the stunning, unreal almost extraterrestrial salt flats of Uyuni and left via the mad Aegean loveliness of Lake Titicaca, a lake whose deepest point is nearly three times higher than the top of Ben Nevis.

We are now in Cusco, a city bursting with Inca and Spanish architecture and archaeology, all generously mashed into one another.  It has a cathedral that rivals many in Europe and the added charm of a Last Supper picture that shows them tucking into a nice roasted guinea pig, a local delicacy.  More mountains tomorrow…

Patrick Healy was the Group Head of Risk Reporting for Man Group plc
© Patrick Healy

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