How Ninjas Killed Risk Management

Whenever there is a major earthquake, there is a rush to find its epicentre.

Whenever there is a suspected arson, the authorities seek out the seat of the fire.

Where then was the heart of what is considered the worst financial situation in nearly 80 years?

Where was its epicentre? Where was the seat of the crisis?

McLeod Governance submits to its learned readers that it is Suite #100, 1885 Lundy Avenue, San Jose, California.

How is it that McLeod Governance – not known for its geographical preciseness – can be so precise on this?

What is it that makes 1885 Lundy Avenue – near the corner of Commerce Drive and just down from Fortune Drive – San Jose so special?

It was at the start of the global financial crisis, the head office of HCL Finance, Inc.

HCL Finance, Inc. was founded in 1983 .

It specialised in minimum documentation loans, i.e., no income, no job and no bank deposit verification loans.

Its most “famous” loan was the NINJA loan – the NIncome NJob (No) Assets loan.

Yes – you read correctly.

HCL Finance, Inc provided money to people with 1) no income; 2) no job AND 3) no assets.

McLeod Governance is not suggesting that HCL Finance, Inc was responsible for the credit crisis we now find ourselves in. Indeed there are many other great examples of conceptually challenged loan structures.

The “balloon mortgage,” in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

The “liar loan,” in which the borrower is asked merely to state his annual income, without presenting any documentation.

The “option ARM” loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

The “piggyback loan,” in which a combination of a first and second mortgage eliminates the need for any down payment.

The “teaser loan,” which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn’t have sufficient income to make the monthly payments when the interest rate is reset in two years.

The “stretch loan,” in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.


Risk management is a very simple concept at its core.

It is predicated on the management of risk.

At what point did the risk management framework within HCL Finance, Inc. consider it a good idea to loan money to a demographic that had no reasonable basis for repayment?

Assuming for one moment that there is no fraud involved – and McLeod Goverance is not suggesting that there is – how then is it possible that a sound corporate governance environment with strong theoretical risk management frameworks and compensating internal controls could firstly conceive a NINJA product and then secondly allow for it to be released?

We as interested spectators need to decide whether it was HCL Finance that was at fault in the pursuit of a quick profit or the profession, concept and theory of risk management that failed HCL Finance.

If it is the latter, then we can truly say that ninjas destroyed risk management.

For a discipline dedicated to the elimination, mitigation and reasonable acceptance of risk should never have allowed the ninja to be born.

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