Talk of "green shoots" abounds with the S&P 500 up 40% from its lows in March 2009, but Goldman Sachs (NYSE: GS) CEO Lloyd Blankfein remains cautious in his outlook for the global economy. "I think it's going to be a long, protracted recession," he said while speaking on a panel at the annual International Organization of Securities Commissions (IOSCO) conference in Tel Aviv.

Blankfein also emphasized the importance of intelligent regulation and risk management, warning fellow finance executives not to discount the latter. "The culture of risk management is very important and hard to legislate, but at the end of the day, you have to make sure that the people on the risk management side of your operation are just as capable, and maybe therefore, just as well-paid and have the career opportunities as people on the producing side of the business."

This post is part of a feature on companies and products that our bloggers think are in need of a makeover. See all 26.

In light of the short-selling ban, someone recently asked me for my opinion about short selling. Personally, I'm grudgingly accepting of the practice, but I believe that some serious changes need to be made. I believe that the practice of short selling should be made harder to engage in, more expensive to execute, limited in duration, and heavily scrutinized.

The uptick rule is fine, and it never should have been suspended, but I feel that it falls short of the mark. Bear raids can still be orchestrated in spite of uptick only buys. Purchasing on the uptick simply slows the process a little. A system must be developed by which the practice of bear raids is effectively terminated.

When I researched opinions and viewpoints on short selling, it became quite apparent that the writers I had encountered were not supporting short selling nearly as much as they were simply railing against a short-selling ban. Not one person actually made a case for why the practice is essential to market health. The closest I came to finding an eloquent argument in favor of short selling was an article by Paul R. LaMonica, editor at large, CNNMoney.com. Though Mr. LaMonica didn't really explain to me why I should be shorting stocks to benefit the markets, he did quote the SEC on 3.5 reasons why shorting might be beneficial.

This post is part of a series on some of the most memorable companies that have disappeared.

I credit Nick Leeson for creating jobs for lots of my friends. Back in 1995, when he single-handedly brought down Barings Bank with currency trading run amok, I had never heard the term "risk management." But I soon started hearing right and left of friends getting highly paid jobs at financial firms in the "risk management" department.

Apparently, after Mr. Leeson lost $1.4 billion dollars in unauthorized trading rendering Barings insolvent, financial institutions around the world decided to put in more rigorous systems of checks and balances that would keep such things from happening. Hence, newly expanded risk management departments.

Founded in 1762, Barings Bank was the oldest merchant bank in London, financed the Napoleonic Wars, and was the Queen of England's own bank.

This post is part of a series on some of the most memorable companies that have disappeared.

Going, going, gone!

No more Bear Stearns. What a shame. It did not have to be, but alas -- bad management, greed, and too much negativity on Wall Street made it unsustainable when sustainability is the word of the day. It is, or should I say was, one of the foremost investment banks on Wall Street for many decades.

JPMorgan Chase (NYSE: JPM) completed it acquisition of Bear Stearns (NYSE: BSC) on May 30, 2008. As a result, Fitch Ratings has upgraded the ratings of BSC and removed them from Rating Watch Positive, where they were originally placed on March 17. As the direct and sole owner of BSC, JPM has assumed the capital structure of BSC.

Bear Stearns had been one of the top investment banking, clearing, and brokerage firms in the United States, serving major corporations, institutions, governments, and high net worth individuals. Through several subsidiaries, it provided asset management, lending, and merger and acquisition advisory services. It's been a leading market-maker for NYSE-listed securities (through Bear Wagner Specialists), as well as for OTC shares, corporate and government bonds, and derivative products.

It was these derivative loan instruments that did them in. Bear Stearns, a company that for decades was relied upon to help its customers assess risk, fell short when it came to managing its own. Management was not watching very closely, and if they were, they did not understand what they were seeing. (See Serious Money: The page on Buffett Part V: Company Management.)

In this month's Portfolio magazine, Michael Lewis wonders if the Black-Scholes formula -- the formula used to calculate and manage risk throughout the financial world, including determining the risk of trade positions and hedging strategies -- is flawed.

The Black-Scholes formula is an advanced mathematical formula generally credited with revolutionizing options pricing. Its assumptions are the basis for short trades and options designed to protect a trader against losses, no matter how much the market falls.

However, as Lewis outlines, while the formula has been good, it is not perfect, as evidenced by the October 1987 stock market crash, when traders and institutions learned that even with Black-Scholes techniques deployed, when the market is crashing and no one is willing to buy, it's impossible to sell short. The outcome? On "Black Monday," the Dow Jones Industrial Average plunged 508 points or 22.6% on October 19, 1987.

One of the characteristics of this decade's bull market has been the emergence, use, and growth of derivatives, options and futures products, both for hedging and for pure investing purposes, and a company in this segment worth a review is FC Stone.

FCStone Group, Inc. (Nasdaq: FCSX) provides risk management consulting and transaction execution services to commercial commodity intermediaries, end-users and producers. An FCSX unit also offers grain merchandising services for grain buyers/sellers in the U.S. and overseas; the company also ships about 100 million bushels of grain per year.

Amex Financial Select Sector (AMEX: XLF) volatility decreases after rate cut.

• XLF closed at $35.15.
  
• XLF seeks to replicate the total return of the Financial Select sector of the S&P 500 Index. Citigroup (NYSE: C), Bank of America (NYSE: BAC), American International Group (NYSE: AIG), JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), Wachovia (NYSE: WB) and Goldman Sachs (NYSE: GS) are components of the XLF.
  
• XLF total option volume was 294,706 contracts on 9/18 . XLF over option implied volatility of 23 is below its 7-week average of 30 according to Track Data, suggesting decreasing risk.

Volatility Index S&P 500 Options - VIX at 20.03; 10-day moving average is 24.43.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Insurance and risk management company Aon Corporation (NYSE: AOC) is posting good returns in all three business units on the three most important quantitative metrics: organic growth, margin expansion, earnings improvement. The stock is worth considering as part of a balanced value-income portfolio. Its P/E multiple is just above industry standard, but its EPS is 50% above industry average. Even with a market cap in excess of $12 billion, AON stock still returns 10% quarterly growth year over year, far in excess of industry standard. The stock has already appreciated in price more than 15%, opening the year trading at $35.39 and closing on June 12 at $41.80.

Aon Corporation recently reported very good 1Q 2007 earnings. Revenue was up 10% for the quarter to $2.4 billion, 5% of which was due to organic growth. Net income increased 8% to $213 million or EPS of $0.66. Net income from continuing operations rose 23% to $212 million. Aon posted these numbers despite a tough North American market in which rising health care costs have put pressure on medical insurance and risk management companies. During this quarter, Aon realized restructuring savings of $46 million and is on track to realize FY 2007 savings of $235 million and FY 2008 savings of $280 million. The company also repurchased $345 million of its stock and has authorization from its board to repurchase up to $2 billion of its stock.

The Risk and Insurance Brokerage Service segment posted an impressive 8% gain in revenue due to new US business and 8% in Asia Pacific. Overall, this unit posted a 6% revenue increase despite soft markets in the UK and Australia. The Consulting unit increased revenue by 7% to $329 million despite the termination of large outsourcing contracts. The Insurance Underwriting unit grew revenue by 16% to $574 million, up $79 million from 1Q 2006. At the same time as it posted organic growth revenues, Aon Corporation also increased policyholder benefits 27% to $323 million. Clearly, Aon Corporation has developed a profitable business strategy even in the midst of a challenging economic and political environment regarding health care insurance costs.

To most people, even most investors the words "entertaining" and "derivatives" do not belong in the same sentence. Yet Satyajit Das' Traders, Guns, & Money is one the most entertaining investment books I've read in a long time, and is also on excellent primer on topics including derivatives, risk management, and Wall Street's inner workings. This will sound like hyperbole but it isn't: this is possibly the best insider account of a career in investments since Michael Lewis's book Liar's Poker came out in 1989.

Das is able to combine an informative introduction to the "dazzling world of derivatives" along with a jaded, cynical depiction of Wall Street greed. He discusses financial markets using a well-known quote from Donald Rumsfeld, and it is surprisingly effective: "There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know."

Das uses this to discuss efforts to quantify risk, which he often describes as silly, and suggests that most professionals know it is too: "Risk management is like any religious text; nobody is willing to criticize it in public but few follow it completely in private." His stories about the sophomoric antics among young traders are entertaining, and may discourage some young people from pursuing a career on Wall Street (or encourage it in some cases).

In all, I can't recommend this book strongly enough. Risk management and derivatives are fields that all investors should have some knowledge of because they are such a large part of financial markets today. Traders, Guns, & Money is a great way to learn about them.

On a side note, Warren Zevon's song Lawyers, Guns, and Money (I assume the title of this book is a take-off on it) is a classic and should be on the iPod of every investor.

When it comes to predictive data analysis and reporting, Fair Isaac (NYSE:FIC) is the stand out leader in that field. Fair Isaac offers statistics-based predictive tools for the consumer credit industry. You know their talents well. Predictive statistical analysis is the type of methodology used to collar you with your credit score. Fair Issac credit score analysis algorithms are utilized by the three big name credit reporting bureaus, Experian, Trans Union and Equifax. Basic FICO scoring systems have been in use since 1970. The current Fair Isaac credit scoring system has been in use since 1981. In addition to credit risk analysis, Fair Isaac also markets solutions for insurance applicant risk assessment, other financial risk predictors and data management solutions as well.

What might make Fair Isaac a good investment? Well, one thing is for sure. If the company is going to run into trouble they should be the first ones to know. I'll just give you some historical background on the company to enlighten you but I'll have to stop there because frankly when it comes to analyzing analytical analysis, I'd rather be sorting laundry or something exciting like that.