At Last?

January 26th, 2010
Not the Light at the End of the Tunnel

Not the Light at the End of the Tunnel

Over eight years of negotiations over the fate of the former Deutsche Bank Building may be coming to an end. The building, located at 130 Liberty Street, faces the World Trade Center and became a serious environmental hazard on September 11, 2001. Now the Lower Manhattan Development Corp. (LMDC), established to oversee the reconstruction of the community following the terrorist attacks, may be close to resolving the expense of the building’s decontamination. Since 9-11, the building has been covered by a dark tarp to limit airborne contaminants of soot and ash released when the World Trade Center burned to the ground. Community activists opposed the proposed demolition of the building for fear of health effects to the local residents. Instead a compromise was negotiated: a staged decontamination and demolition process. But the process appeared jinxed as it dragged on for years, marred by horrific accidents and costly delays. In 2007, a fire broke out in the building, claiming the lives of two firemen. The building contractor admitted to wrongdoing in respect of its practices. The delays caused the costs of building decontamination to reach in excess of $200 million, provoking protest from the building’s insurers. The insurance companies have an excess of loss agreement in place to cover the decontamination costs. But the manner in which those costs have escalated necessarily gives rise to disputes over payments due. The LMDC and the insurance companies are reportedly close to concluding a financial settlement. Now comes the next round of disputes: what to do with any payments in excess of building remediation costs? Various groups are lobbying for their share of the spoils. Imagine what misery continues to exist for the residents and small businesses of disaster-ravaged communities who just want to put the tragedy behind them and get on with their lives.

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Posted in Environmental Hazard, Recovery | No Comments »

Fragile Urban Infrastructures Require Flexible Response

January 7th, 2010
London Blizzard

London Blizzard

This is the time of year when I most miss living in Switzerland. My friend took the attached photograph of blizzard conditions in London for which the city is never prepared. Public transportation and all other essential services grind to a halt with such weather. Businesses need to plan for workers to telecommute from home. This necessarily requires explicit procedures for the use of company-issued laptops. Laptops should be used for business purposes only, as surfing popular consumer sites through the Internet browser expose the business to more risk of malware and other intrusions. Exercise special care for file storage, as you want to discourage saving files to the hard disks of laptops where they can be lost or damaged. The use of a virtual private network will allow secure access to company computing facility and proper backup of files across the network. When the forecast is unclear, encourage telecommuting to keep employees from traveling on unsafe roads. Advance planning will limit the impact weather-related disruptions on your business.

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Posted in Everyday Disaster | No Comments »

Small Business Banking Less Secure Online Than Personal Banking

January 5th, 2010
Cyber-Defenses

Cyber-Defenses

The American Bankers Association and the Federal Bureau of Investigation have responded to increasing cyber-robberies targeting small businesses. They issued an advisory to use a separate computer with no other functionality except for online banking.  The FBI is investigating suspicious patterns of “banking Trojans” or malware on computers that enable access to online bank accounts. These Trojans are becoming increasingly sophisticated in their manipulation of technologies for clearinghouse and wire transfers.  The FBI has investigated more than 200 incidents in which cyber-robbers effected fraudulent transfers of banking funds involving more than $100 million for which the victims were mostly small businesses.  Sadly, business banking accounts do not benefit from the same protections afforded to individual consumer accounts, which require banks to fully reimburse account holders who immediately report fraudulent account activity. In the case of banking fraud perpetrated on a business account, the bank can deny its liability for the failure of the business customer to properly protect its computer.  We should all request clarification from our banks on their fraud protection policies.  Meanwhile, protect your business by conducting banking activity from a stand-alone computer that is never used for e-mail or web browsing, making it less vulnerable to infection by malware.

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Stress in the Florida Insurance Market

January 3rd, 2010
Calm Before the Storm

Calm Before the Storm

State Farm Florida has entered into a consent order with its state insurance regulator that will help the company to stabilize its financial condition by reducing its exposure to catastrophes and raising premiums. The Florida property insurance market is under enormous pressure; 102 of the 210 private property insurers operating in the state are losing money. Three went out of business in the last year.  The consent order allows State Farm to non-renew no more than 125,000 of its 810,416 residential property insurance policies in Florida. Those policyholders designated for non-renewal will have at least six months’ notice and will be offered other insurance options. The new rates will go into effect as the remaining policies are renewed. State Farm Florida will remain the largest private insurer of property in the state and was granted a 14.8% rate increase on all homeowners’ policies. Policyholders need not take action at this time, but those of us who have looked at the declining property market in Florida need to take into consideration the rising costs of homeownership there.

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Posted in Hurricanes, Insurance companies | No Comments »

Sleepless in Chicago

January 2nd, 2010
Booth School of Business University of Chicago

Booth School of Business University of Chicago

Who goes to Chicago in the fall and winter months? Well, I do. I had the privilege to speak at the annual small business banking conference sponsored by Source Media, publisher of American Banker. I appreciate the opportunity to hear the banker’s perspectives on declining commercial and small business loan volumes. One theme that emerged in the discussions was the opportunity afforded by the recession to improve underwriting discipline while rebuilding banks’ capital bases.  While that is hardly the news we want to hear, to be fair to the bankers, regulators have put them in an impossible position. Privately, bank supervisors hector management about extending credit while publicly, politicians pillory them for their failure to do so. It is a no win situation for the banks. Economics, not politics, should drive small business lending decisions. I took advantage of my stay to meet with Linda L. Darragh, Clinical Associate Professor of Entrepreneurship at University of Chicago’s Booth School of Business. A passionate advocate for entrepreneurship, she initiated a venture fund and served on the Mayor of Chicago’s high technology task force. I took full advantage of her insight and suggestions as to how to improve my own business operations. So that encouragement compensated for the gloomy credit outlook! Actually, my visit to Chicago was a joy all round and I look forward to returning.

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Happy New Year

January 1st, 2010
Looking Forward to a More Prosperous 2010

Looking Forward to a More Prosperous 2010

As we look forward to 2010, I have prepared New Year’s resolutions for my business. I am re-framing the recession as an opportunity.  In past years, even in the frothy bull market, I spent too much time chasing clients for payments past due. I hated being a bill collector! It is not just a drain on your time, but a drain on your energy. Now I am using the difficulty accessing capital to explain to current and future clients why I require a more significant retainer before commencing work. Not everyone will accept those terms, of course, but those who do are serious and those who don’t may be opportunities that I should not pursue anyway. The end result may be a smarter, but smaller business, but one that will better support my lifestyle objectives.  Large corporations typically refer to their procurement policies to explain why they cannot pay retainers. After all, they say, we pay everyone net 45 days. But with widespread knowledge about the access to capital, it is easier to explain why that no longer works. It is hard to justify drawing down on your working capital to perform work and hope for timely payment. Assuming of course that your client doesn’t go into bankruptcy. The new environment may offer some peverse upside and my New Year’s resolution is to find it.

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Posted in Entrepreneurship | No Comments »

New Year’s Eve Celebrations

December 31st, 2009
From Ireland to New York

From Ireland to New York

And I will be far from the action. Thankfully, the security alert around an unattended van in Times Square revealed nothing more significant than an abandoned vehicle. But between the cold weather and the crowds, I try to be out of mid-town Manhattan no later than 3:00 p.m. on December 31, which is when the police begin to close off traffic for the countdown celebrations. But I will miss seeing the New Year’s Eve Ball, a 12-foot geodesic sphere and, weighing in at 11,875 pounds, twice the size of previous balls.  The 2010 New Year’s Eve Ball is covered with 2,668 Waterford crystals and powered by 32,356 light-emitting diode, allowing it to emit more than 16 million colors and billions of patterns. As I have Waterford crystal stemware on my home tabletop, I am delighted to see the modern display of this traditional craft. I wish you a safe evening ushering in the New Year as we look forward to starting afresh in 2010.

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Running Naked

December 30th, 2009
I Photographed This Sign at the San Diego Border Crossing

My Photo of the San Diego Border Crossing

“Running naked” refers to the decision to forego insurance for known risks. It is an increasingly popular strategy among states experiencing budget constraints. But it is risky. Pre-financing a natural disaster through insurance is more cost-effective than financing recovery but for governments with falling tax receipts, the temptation to forego insurance arises if probability of a natural disaster is low. Funds spent on insurance premiums are not recoverable, which could lead to regret when funds are diverted from other programs for insurance coverage and the storm season proves mild. To save resources following the credit crisis, states are cutting public reinsurance programs to save premium expense. For example, less than one year after reinsurers paid $1.5 billion in claims related to Hurricane Ike, Texas opted out of its reinsurance program to save premium expense. California soon followed.

Governments typically fund emergency and relief efforts and rebuild public infrastructure after a disaster by issuing debt, raising taxes or reallocating funds from other budget items. These alternatives are considerably more expensive than pre-financing risks, but the states are presumably gambling that the federal government will bail them out in the event of a major natural disaster. European governments have also been cutting their pre-disaster risk bills to alleviate budget strains. But the gamble may not pay off. The U.K. this year experienced unexpected flooding in some parts of central and western England. In any given year, 30% of floods occur in regions that have no prior history of flooding, making the choice to forego insurance a risky one.

Ironically, developing countries are moving in the opposite direction. They face considerably greater challenges, such as the awful trade-off of limited resources and compelling needs to invest in education, health and other infrastructure. To resolve these competing interests, the World Bank structured its MultiCat Program to allow countries to purchase cost-effective coverage through the capital markets for various threats, including floods, earthquakes, hurricanes and windstorms. The first such program was structured in Mexico.

Will the bet pay off? Should a major disaster strike California or Texas, residents of those states will face onerous tax increases if they cannot persuade the federal government to bail them out. But even should the U.S. be lucky enough to avoid a major catastrophe, we are at risk of ceding the lead in financial innovation to other countries.

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Posted in Emerging Economies | No Comments »

It Adds Up

December 29th, 2009
Irreplaceable

Irreplaceable

At a recent small business event, I had the pleasure of being seated next to a chapter director of the National Hispanic Chamber of Commerce. Over lunch she shared with me her own insurance disaster, which illustrates the importance of good record-keeping – a costly way of learning a lesson! She collects Lladro figurines. Over 30 years of marriage, her husband would give her gifts from Lladro for commemorating special events: their wedding anniversary, Valentine’s Day, her birthday and Christmas. Lladro figurines are handcrafted in Spain and cost several hundred dollars each. Some of the figurines she has collected are irreplaceable as they are models that are no longer in production. And of course, their sentimental value is incalculable as they represent precious memories with her husband, who passed away. She had the figurines prominently displayed in a glass curio cabinet in her living room. She lost her collection when her home was burglarized. Unfortunately, she did not calculate the value of her collection in her coverage limits for her homeowner’s insurance. Nor did she endorse the collection or document the assets with videotape or photography, for example, or sales receipts. Over 30 years, that collection had become quite valuable, so in addition to the emotional distress associated with its loss, there is a significant financial loss as well. It is an all too common mistake to neglect to update asset values or to underestimate the value of non-traditional assets. I chided Stefan, our IT guru, for this very oversight. He had purchased a state-of-the art stereo system at a retailer’s bankruptcy sale for a ridiculous price. But in the event of fire, theft or other loss, he would never be able to replace that asset for what he had paid for it. It is not covered in his insurance policy, yet he insures his automobile, which is worth far less. I use the New Year as an occasion to update my business and home records to ensure that my insurance records are up to date. Please do the same – it will give you peace of mind.

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Posted in Insurance companies | No Comments »

Air Travel Gets Nastier

December 28th, 2009
Delta NWA Flight

Delta NWA Flight

The attempted Christmas Day bombing on Northwest Airlines Flight 253 from Amsterdam to Detroit was thwarted, but air travelers will continue to be inconvenienced by new rules imposed by the Transportation Security Administration. There does not appear to be a cost-benefit to such measures. According to the Bureau of Transportation Statistics, there have been six attempted terrorist attacks on flights into or within the U.S.: four planes that were hijacked on 9/11, the shoe bomber’s attempt to blow up a plane in December 2001 and now this incident. This works out to one terrorist attack for more than 16.5 million airline departures within or to the U.S.  TSA’s response was to further inconvenience airline passengers by various means including requiring passengers to remain seated during the final hour of flight and to forfeit access to their carry-on luggage at that time. I limit my air travel, not because of safety concerns, but because travel has become such an ordeal. If you have not already done so, now is the time to invest in a $99 camera for cheap Internet videoconferencing. Even if your recession budget allows for air travel, the inconvenience endured by Air Canada passengers into the U.S. today suggests that all but the most critical business travel should be re-evaluated.

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Posted in Sabotage | No Comments »

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