Diva Downside

Within minutes of the recent sentencing of Martha Stewart to five months in prison and two years of probation, the stock of the media business she founded, Martha Stewart Living Omnimedia, soared by more than a third. Evidently, the market had expected a harsher sentence, so this was considered good news for the company, if not so much for Stewart.

In the meantime, another high-profile miscreant - Riggs National Corp., which recently agreed to pay a $25 million fine related to allegations of violations of anti-money laundering laws - also resolved questions about its future by agreeing to be acquired by PNC Financial Services Group. The bank will assume the PNC name and divest all its diplomatic and international businesses, and PNC has the right to walk away from the deal if significant new regulatory problems arise before it closes. But Riggs' damaged reputation and questions about its management and practices are realities - and risks - one hopes have been taken into account by the acquiring institution.

Assessing the possible advantages (or lack of them) that PNC might gain from the Riggs deal, much like predicting the future prospects for Martha Stewart Living stock (and the company itself), probably has as much to do with whether one is an optimist or a pessimist as with how well one can analyze a financial statement. Risk management is all about trying to quantify what seems to be unquantifiable - the likelihood of someone turning out to be a deadbeat (or worse), the chance of an act of nature or God destroying a home or business, or the odds that the stock market will go up or down. But as the tools to analyze and manage risk have become better and more sophisticated, risk itself has become more varied and complex.

The Martha Stewart and Riggs National cases couldn't be more different, but they do share one relatively new form of risk to be managed: reputational risk. And while investors might be excused from never having suspected in the late '90s that the Domestic Diva's reputation would ever be challenged (except, perhaps, on charges of being a bully), Riggs' long history of questionable relationships - and the liabilities that might come with them - is evidence to be scrutinized, modeled and evaluated. As always, buyer beware.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio