This document discusses business failures and lack of antifragility. It provides examples of fragile businesses like Lloyd's of London, Long Term Capital Management, Equitable Life, Enron, Lehman Brothers, AIG, RBS, MF Global and Kodak. Common fragile characteristics included size/complexity, reliance on debt, upfront rewards before completion, lack of redundancies and focus on the short term. The document suggests making businesses more robust through decentralization, simplification, redundancies, higher capital, lower debt, and ensuring all participants have skin in the game. Businesses could be made more antifragile through diversification, accepting earnings volatility, contingencies, and stress testing during good times

1. Business failures and the lack of
antifragility - Michael Folkson
“When strong winds blow, don’t build walls, but
rather windmills: there is a way to turn every bit
of adversity into fuel for improvement”
Chinese proverb

2. A quick note on failures
• Failures are healthy for the wider economy.
• The economy is antifragile if it is made up of a
multitude of fragile, robust and antifragile businesses
that are allowed to fail and don’t pose a significant
systemic risk.
• There is a spectrum from fragile to antifragile and
organisations, economies, complex systems fluctuate
on this spectrum.

3. Timeline
1991 – Lloyd’s of London
1998 – Long Term Capital Management (LTCM)
2000 – Equitable Life
2001 – Enron
2008 – Lehman Brothers, AIG, RBS
2011 – MF Global
2012 – Kodak

4. • Reinsured long tail US general liability resulting in
exposure to asbestos and pollution claims
• LMX spiral or ‘pass the parcel’
• Risk controls weakened as big insurance groups
undercut Lloyd’s premiums
• Increased capacity with ever growing numbers of
Lloyd’s Names
• Brokers received upfront commissions
• Lloyd’s Names accepted unlimited liability

5. • Obsession with stock price and quarterly earnings
• Hubris and greed encouraged
• Compensation structure which rewarded deal
making years before completion.
• Discarded reliable businesses that generated cash
flow but had volatile profits (eg EOG)
• Trading and deal making became its sole purpose
• Valued intellectual purity without considering
practicality and pragmatism
• Optimistic assumptions when booking earnings

6. • Securitisation of mortgages (including subprime)
• Upfront commissions to mortgage brokers
• High leverage ratios, low capital requirements
(RWA)
• Overreliance on mathematical models, risk
measures (eg VaR)
• JP Morgan was at forefront of developing credit
derivative market in 1990s
• JP Morgan “is anti-fragile, we actually benefit
from downturns” (Jamie Dimon 2013)

7. • Obsession with one metric (size)
• Focus on minutiae at expense of big picture
• Excessive deference to senior management
• Centralised IT systems implemented
• Not enough time for previous M&A to bed in
before embarking on new M&As.
• Disparate and unintegrated data systems (unable
to provide timely MI)
• Transfer of fragility from RBS to public finances

8. • In 1976 Kodak had a 90% market share for
photographic film and an 85% share of camera
sales in the US.
• Developed world’s first consumer digital camera
and could have launched it in 1992.
• Could not get approval to launch it because of
management’s fear of the cannibalisation of film.
• In January 2012 it filed for Chapter 11 bankruptcy
protection.

9. Common fragile characteristics
• Size and complexity
• Reliance on debt / leverage
• Upfront rewards before project completion
• Minimal redundancies, excessive focus on
efficiency / lean.
• Focus on immediate rather than long term
• Deal junkies embarking on new deals before
previous deals fully implemented.
• Unwillingness to challenge senior management
(cult of personality)

10. How could they have been made
robust?
• Decentralisation
• Simplifying procedures
• Building redundancies into business models
• Higher levels of capital
• Reduced debt / leverage
• Pooling risk with robust constraints on
autonomous units
• Maintaining reliable sources of cash revenue
• Ensuring all participants have skin in the game

11. How could they have been made
antifragile?
• Jim Collins’ yin and yang / Taleb’s barbell strategy
• Accepting volatility of earnings
• Contingencies
• Diversification
• Maintaining ownership of traditional businesses
whilst investing in innovation offshoots.
• Stress testing (hacking) and innovating businesses
during the good times.
• Investing in infrastructure and R&D (research and
development)