Taking It To The Limit
I don’t think I have that gene that causes me to test the limits on everything I do. I know people who have that going on and some are still with us and some managed to exceed their limits and pay the ultimate price. Obviously, not every activity has a terminal penalty associated with pushing too far. Sometimes the reward is simply a proverbial speeding ticket, a slap on the wrist or a dire warning. And it is sometimes good to push the envelope, as they say, to see how far you can go. That expression comes from aeronautics and its what guys like Chuck Yeager in The Right Stuff spent their time doing every day, flying a test airplane beyond the structural or aerodynamic limits binding it to the reality of the earth’s gravity and physical forces. But by definition, when you push the envelope you are going outside the perceived wisdom of acceptable risk parameters, perhaps courting disaster or perhaps establishing new limits. In Charlie Brown terms, you can become a goat or a hero.
I used that envelope expression all the time when I was working on the New York Wheel because I determined at some point in the process that we were up against the limits of both physics and metallurgy, trying to build a 630 foot observation wheel out of what looked from a distance like the finest of elements, almost a dainty structure as opposed to a sturdy one. This was a case of being told we were well inside the envelope of known and established structural and material science, only to find that we were actually way out on a very thin limb, going where no one had dared tread before. That proved to be a $450 million problem and the legal meter is still running, specifically on the suit that the design/build team for the wheel did not fulfill its contractual obligation. We had agreed on a fixed price contract of $X. They cajoled us into an added 14% based on their additional site diligence. We then took on an added and disputed portion of costs that added yet another 17% AND agreed to pay them an even greater price of another 15%. That took the cost to a 48% overrun. This was over the course of four years, time enough for any engineering or scientific diligence into their ability to do what they said they were going to do. And even that they couldn’t make work. Finally, in litigation papers, they said they could build the project for 151% MORE than they had originally contractually agreed. That is nothing short of taking it well over any reasonable limit and into the surreal.
Why does such a thing happen? Is the engineering and science so unclear or even flawed? I don’t think so. I think there was some engineering getting out over the skis of the engineering reality, but mostly it was people trying to make money and get career kudos by doing something which seems like it shouldn’t be that hard and should be within their skill base, but simply isn’t. I don’t think they probably felt they were pushing the limits, but didn’t have enough penalties for being wrong about that, so they wandered over the limits.
In business, I would characterize myself as having been an aggressive risk-taker, but not really a person who actively sought to push limits. This was not a passion for me, quite the opposite. I chose to go into banking, a generally conservative realm, so that should tell you a fair bit about my risk tolerance. It so happens that circumstances that I encountered in banking put me on the leading edge of innovation, but not necessarily of risk. To some it looked riskier, but let me give you an example. In 1985, I was asked to take over $4 billion of the banks challenged sovereign loans to Latin American and other developing countries. My job was to find a more creative way to recover those loans and that led to many creative solutions of swapping the loans for more liquid or “flexible” assets that could get us out to cash with greater assurance. This was hard to do and its what everyone wanted to do one way or the other, so it was a crowded, difficult market. This was a career risk for sure (but was it, if you have limited downside and great upside?) and there was risk in owning equity swapped into from the sovereign debt, but it was actually a less risky strategy than sitting with the debt and watching its value erode. In addition, there was an ability to get out ahead of this program and become enough of a leader in these techniques to make a business out of doing this for other. That is actually what we were able to do. So, I would argue that we did not push the limits of risk, but we certainly needed to push the limits on creative asset management.
Strangely enough, the times I felt like I got out over the limits were a surprise to me. These things happened most noticeably seventeen years apart. The first time was in 1989 when a small unit for which I had responsibility got defrauded by a large client. The loan was not a surprise and the concern over the loan was out on the surface and being discussed by all the powers that be long before anything bad came to light. The surprise came in the extent of the deceit and the complicity of the collateral agents. What is that awful word? Unprecedented. The other horrible word is unavoidable. All the controls and circuit-breakers were in place and being observed and still, the bomb went off and looked as though we were being unwise or risk-prone. The other time, in 2007 was even higher profile. It took five months to unfold, so if it was a case of exceeding a limit, it was the slowest motion foot-fault of all time. It was a strange case of being in a space that anyone would have been in and still everything changed overnight and liquidity was simply gone. We made no bad judgements because there were no actions the market allowed us to take. It shut down and froze our position and all we could do to thaw the situation was for naught. Damn, once again unprecedented and unavoidable. I hate it when that happens.
I do not lead my life by testing the limits. That is quite different from not being afraid of risk. I have often said that once you have looked into the abyss, it simply doesn’t scare you anymore. I find myself characterizing my relationship to risk and limits with those thoughts. I do not manage my own money and only make private investments these days when compelled to do so for friends. I do not live wildly beyond my means, but rather lead a fairly normal and subdued life. And now, in terms of COVID, Kim and I try hard to be responsible and careful followers of state and CDC guidelines. That is relatively easy for us, given that we are as blue as blue can be and do not have political ideology getting in the way of good medical common sense. We plan to take nothing to the limit.
But then, I think I just took something to the limit and it caused me to learn my limitation. That’s right Eagles fans, turns out I am taking it to the limit…one more time. My year has been about reintroducing myself to DIY projects and I have suddenly become inundated. I have the opportunity, in order of scale, to play general contractor on a deck repair project involving joists and pilings and marine-grade exterior plywood. I have the opportunity to play general contractor on a far-reaching outdoor lighting project with low-voltage wiring and transformers and such. And then I have undertaken a very ambitious outdoor bison sculpture project that involves boulders, welded metal and more. I cannot handle all three and I cannot boot the sculpture so I have forced myself to take a turnkey proposal for the lighting while I keep both hands on the deck, which can be a triumphant salvage or an engrossing disaster. So, I have found out about taking it to the limit and am appropriately chastised.