President Bush, Refco, & “The Chihuahua”

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December, 2010

It’s not overtly obvious, but these seemingly unrelated topics actually do have a connection. Let me explain.

President Bush was at the Union League Club in Chicago last month promoting the release of his memoir Decision Points.  According to Crown Publishers, Decision Points will offer “gripping, never-before-heard detail” on such historic events as the Sept. 11, 2001, attacks. Anyway, that got me thinking; thinking about all the horrible life-altering events of that day and the days that followed. It also got me thinking about how those events were the catalyst for some very important regulatory changes in the financial services industry. Anti-Money Laundering (AML) rules and regulations were put into place in April of 2002 as a direct result of the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, which was signed into law barely a month after the attacks. Business Continuity Procedures (BCP) a/k/a Disaster Recovery Procedures were adopted about a year after that.

AML always made sense to me. And while for some firms it required significant amounts of new procedures and additional staff, its goal was to help fight the war on terrorism, something everyone supported. Not to mention, it had some interesting elements; high finance, international intrigue and danger; heady stuff for a compliance staffer. Disaster Recovery Procedures on the other hand seemed like more of a nuisance; boring and void of any real impact, especially for smaller firms. While I’ve since changed my opinion, daily news accounts serve as a constant reminder that not everyone has learned the important lessons of September 11th.

I learned my lesson in October of 2005. In my previous role as the CFO of an online futures IB, I remember when news reports of Refco’s eventual failure started to surface. As any industry veteran can tell you, Refco had a regulatory history that would make Charlie Sheen blush. They were the bad boys of the futures industry and, like Houdini always seemed to escape the regulatory death blow. So when these charges of “accounting irregularities” surfaced it seemed like just more of the same. However this time they wouldn’t escape. As rumors swirled, we started getting calls from a significant number of clients we had introduced to Refco. Like us, our clients were getting nervous. Our choices were simple, either help the client close the account and get their money out, and likely lose their trust and continued business, or offer to move their account to another FCM. We did both.

For those clients that wanted to continue to trade but wanted a different and safer FCM, we were happy to oblige. Fortunately, we were an Independent IB and maintained multiple clearing relationships. We simply called one of our other FCMs, explained that we wanted to quickly move a large number of accounts, and with their help, got it done. It was a defining moment for us. Our clients were thrilled that we had an alternative for them. Without an effective Business Continuity Plan we faced not only losing a significant amount of business but maybe even the loss of our firm.

So, I’ve tied together President Bush and Refco. What about “The Chihuahua”?

Last month, Carnival Cruise ship, The Splendor, endured a fire in the aft engine room that disabled its six diesel electric engines. Passengers described the conditions as dark, smelly and frustrating. Fortunately, no one was injured. It appears that Carnival had some elements of a disaster recovery procedure but overall it wasn’t very effective. There was no heat, no hot water, no hot food, no cell phone service and no lights in the ships interior. They did however, manage to open the ships bar. It’s a safe bet that drinks were “on the house”. A poll of the ship’s passengers indicated that only about half of them would take Carnival up on its offer of a discount for a future cruise; a customer relations nightmare for sure. There’s no doubt Carnival will soon be back at the drawing board making significant changes to their business continuity procedures.

The ship arrived safely in San Diego but had to be escorted by two Mexican tug boats. Good thing they had two, because one broke down, temporarily leaving a tug nicknamed “The Chihuahua” to bring the mammoth cruise liner to port.

Disaster Recovery Procedures, Business Continuity Procedures, Backup Plans, whichever term you prefer, can be life savers and business savers. Take the time to evaluate your vulnerabilities and come up with some practical realistic solutions. Maybe even name your plan “The Chihuahua”.

Mark DeRolf is owner and Principal of Brightwork Financial Services, a Chicago-based Independent IB. He has more than 25 years experience in the financial markets industry most recently as CFO and CCO of an online retail brokerage firm. Throughout his career he’s provided support and guidance to FCM’s, Broker-Dealers, IB’s, CTA’s and proprietary trading groups. You can reach him at