Wednesday, November 12, 2008

ERM-BC-COOP: Lenders as risks

I can't claim to have been "harping" on it, but I have noted in passing that Enterprise Risk Management (ERM) - Business Continuity (BC) - COOP practitioners must - not "should" but "must" - include the money lenders in the list of risks to threaten an organization.

I've also noted - and this I have harped on - that ERM-BC-COOP practitioners must - again, not "should" but "must" - make certain vendors have viable, verifiable ERM-BC-COOP programs. (Projects are nice, but only when they are part of a total, on-going program.)

Validation of my concerns hit the air and pages of the local press this morning.

An article on D.C. radio station WTOP's Web site,, leads off with

WASHINGTON - In a last-ditch effort to avoid financial disaster, Metro - faced with more than $400 million in bank payments - is turning to the Treasury Department for help.

The transit agency's financial woes stem from the recent collapse of financial giant AIG (American International Group). Metro had used AIG as an insurer for a number of deals it made with banks. The deals allowed Metro to do things like extend the transit system and buy new rail cars.

But because AIG's financial status has been downgraded, the banks Metro dealt with can now technically claim default and ask for all of their payment at once.

Metro runs buses and light rail in D.C., Northern Virginia, and near-DC Maryland. It is funded by riders, advertisers, and area governments.

It seems that AIG guaranteed Metro's loan from Belgian Bank KBC Group. This loan, with US$43 million due, apparently is one of many loans Metro has floated to keep transportation moving in DC and parts of Northern Virginia and Maryland. AIG, according to the WTOP article ( backed Metro for 16 financial deals that, if AIG fails and the lenders call in the loans, could force Metro to pony up more than US$400 million. As the article continues, Metro's 2009 capital budget is US$600 million.

Metro is not alone having AIG as the financial backer. The WTOP article identifies Atlanta, Chicago, LA, and San Francisco as other cities that must closely watch the AIG saga.

It seems, based on lessons learned from the AIG "weakness" and our understanding of "business in America" (and probably elsewhere) that not only do we need to ask vendors for their plans, but to ask the same question we should be asking hot site vendors - how many other customers do you have in our organization's situation. For AIG, someone needed to look at its financials, its balance sheet, to compare its assets with its liabilities - including loan guarantees.

Most of us, at one point in our lives, either have guaranteed a loan or had a loan guaranteed by another. We know that the guarantor is "on the hook" if the person getting the loan defaults, and the lender is very careful to assure the guarantor as the assets to clear the debt. I don't know that the lender could demand payment in full if the debtor defaults; that is what the Belgian financial organization is attempting.

In light of Citi Group's wise decision to mitigate its mortgage losses, Citi announced it will work with property owners to help them keep their property. That's just good business; in the end, the properties will (more than likely) be maintained and, when the economy recovers, the borrowers, sure to become Citi Group loyalists, will be able to start paying down the mortgage again. What Citi will ask for in the meantime - interest at some level perhaps - is to be determined, probably on an individual basis.

I seriously doubt Metro will have to sell off its rolling stock and rip up its tracks - D.C. is highly dependent on the system and while it lacks a loud voice in congress, it can have a physical presence on the Capitol steps.

I also think the Belgian lenders are being foolish and short-sighted; theirs is, in my opinion, a knee jerk reaction. Metro is not going to "go away"; it's too valuable an asset in the nation's capital. KBC Group would be better served by taking Citi Group's approach.

For us, ERM-BC-COOP practitioners, the bottom line remains the same: lenders are a risk; they need to be treated as a threat to the organization no matter if the loan is for operational use or expansion. Check the lender's - or in this case, guarantor's - balance sheet, research its major loans/guarantees (most brag that they count BIG NAMES as customers), and have an alternate financial source in mind, "just in case."

While we are at it, we are wise to check out our major customers' financial well being.

Do we need to be CPAs or financial experts to accomplish this? No. But we do need to be smart enough to know CPAs and financial experts and to utilize their expertise.

John Glenn, MBCI, SRP
Enterprise Risk Management/Business Continuity/COOP

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