Jamal Mecklai: The cabaret of risk

MARKET MANIAC

Just as every google-eyed teenager at a cabaret believes the dancer's special wink was just for him (or her, in these modern times), every person who has an exposure to the markets seems to believe that he (or she, in these modern times) has a special sense of what is to come.

Which is great "" it's wonderful to dream. But to run your business on a dream, well...that's another matter.

Now, I am well known for selling dreams so, with the recent volatility of the rupee, my attractiveness "" sexiness??? "" at cocktail parties has grown multi-fold. Everyone wants to know what I think of the future of the rupee. I usually protest that I don't know. But the pressure has become enormous.

Last weekend, I met a very attractive and, well, somewhat scantily clad young lady, who, oh so sweetly begged me (unfortunately only) for my views on the rupee. She was very beautiful and very persuasive. So, I relented.

Consultant (in the thrall of the cabaret girl): Sexy sexy sexy, mujhe... No, no, no, wrong song. Let me try again. (stepping back and with best consultant seriousness): The rupee will move between 45.50 and 46.25 for the next few months and end the year at 45.75. Incidentally (smiling solemnly around the room), my forecast at the start of the year was 44.75, so I have had to adjust it a little bit.

(Squeals and peals of delight) Oh, that's wonderful, you're lovely. Thanks so much. (Loud, smooching sound. Cabaret girl scampers off)

Enter the preacher: Today's sermon will be on lust and the market. Before entering the market, my son (daughter), be sure you define in very specific terms, what you want out of it.

Cabaret girl (off stage): Ain't this a love affair, mister, where you can "" and should "" barrel on in not knowing "" indeed, not caring "" what you will get out of it?

Consultant: If you have a portfolio of risk exposures that are to be managed by your finance or treasury team "" actually, you need to bifurcate responsibilities and accountability within finance, but that's another assignment "" what I was saying is that you need to define a worst acceptable value of that portfolio before you send your team out to battle.

Preacher: It is remarkable how few of you, my children, follow this simple "" and very obvious "" rule.

Consultant: After all, this is a given in most other aspects of business. For instance, most sales people are instructed to maximise returns on inventory without violating the baseline set by management to achieve the minimum acceptable ROCE. And all purchase officers are instructed to get several quotations and always settle for the lowest price after, of course, factoring in value, and in any case to stay below the budgeted expense limit.

Preacher: So how come the treasury team "" who are truly God's soldiers, mandated as they are to transact on both sides of an environment that can only be compared with the monsoon sea "" is usually simply instructed to get the best it can?

Cabaret girl (dancing in, stage left): Why don't you send the guy with the money to see me?

Preacher: And while the good Lord is all knowing, all seeing and all merciful, heaven help the poor treasury man if he doesn't buy at the lowest and sell at the highest possible rate.

Cabaret girl (dancing more vigorously): The chairman or the CEO or some other sexier senior manager would definitely have done it differently.

Consultant: Obviously, this sort of mandate is a recipe for failure.

Preacher: Judging from the amount of internal trauma I see all around me "" and in very respected circles, too "" it is clear that the Lord's work has recently fallen into breach. But "" and hallelujahs all around, large numbers of corporate citizens are coming forth, waving their hands in the air. They have seen the light. The market has taught them a lesson.

Consultant: The market can be an expensive school "" frankly, I charge less "" but it is money well spent provided you learn something for your fees.

Cabaret girl (now dancing around the preacher): And the lesson is...

Preacher (face reddening deeply): The lesson is that despite the fact that I believe "" and hallelujah, do I believe "" that the rupee has fallen about as far as it can currently, I know "" and this is more than belief "" that the Lord works in strange and wondrous ways. You step away from the Lord if you simply sell exports (if you have any left to sell) and hold imports unhedged.

Cabaret girl (now dancing around the consultant): But, then, whatever are we to do-o-o-o-o?

Consultant (face reddening even more deeply than the preacher's): You need to create a set of internal processes that enable you to draw a line for your treasury function. It has to be a process rather than a one-off, since your portfolio is live and changes from time to time as a result of new business and/or variations in your existing business.

Equally "" perhaps more "" importantly, a process is needed to insulate the performance of the finance function from sudden interventions from senior management.

Cabaret girl: I love those sudden interventions.

Consultant (dusting an imaginary speck off his suit): No doubt the buck for managing risk stops with senior management and ultimately it is their view that should be implemented. However, there is a need for greater accountability and the only way to do this is to have an independent "" that is, non-view based "" process for setting benchmarks.

Preacher: Accountability is the hallmark of Godliness. The Lord is the main man of accountability.

Music rises, consultant, preacher and cabaret girl link arms and dance out of the room.

jamal@mecklai.com