Easy does it

I just logged an incident at our facility management about the lights in our department. And because they have a nice system, I got a direct reply via the mail, stating that my call will be done around noon tomorrow. What made this automated reply a bit strange, was that the incident I logged states: "Many lights are broken.". And I suspect that this will still be the case by tomorrow afternoon.

So that's an easy way to close a call,

Zaaf

There is a Moose Loose Aboot the Hoose

A few days ago our team went to a day long offsite meeting. And since no one at work has a laptop, I was charged to bring my trusty MacBook Pro. Every teammember had prepared a few slides about a topic that's near to his work heart. Each presentation consisted only of a few slides, but since they all sparked a discussion of dozens of minutes, the day was easily filled.
The most interesting experience, however, was not the discussion of the topics, but the way in which each of us did our presentation. Next to bringing my MacBook Pro, I had brought my wireless mighty mouse. And whenever someone was due to present, he would stay seated, receive the mouse and start his talk. At the end of the day, we were all yelling for the mouse in the same way someone would yell for the remote controle of the TV.

Sent from my iPod

Northern Rock Bailout is not for the share holders

Recently I've heard all kinds of comments about the UK bank Northern Rock that's being helped by the British government. The gist of those comments is that it is a bloody waist of money by Gordon Brown to use taxpayers money to give it to the share holders. Here's my take on it:

First of all, the money is not handed over to Northern Rock, it's a loan, so the taxpayers will get it back, with interest. The real issue, however, is a settlement risk. All financial institutions loan money to each other all of the time in all kinds of currencies. They do this to either earn a few cents on money they have temporarily available, or to cover a temporary liquidity shortage they have. These periods can be very short. They can be as short as a few hours, but mostly they are a few days. And the money lent out can go around the world in a day. In fact it can go around the world several times in a day. This of course means that the whole financial sector is very much tied into each other. So what would happen if one party could not pay of one of its day-loans? The receiving end could well be defaulting as well to their creditors. This is what we in banking risk management would call a system wide failure. The most well know occurrence of this is the failure of a small German bank called Bankhaus Herstatt to settle their Deutsch Mark payments (see http://riskinstitute.ch/134710.htm and http://en.wikipedia.org/wiki/Herstatt_Bank. The Swiss link is much better). In result a whole chain effect of defaults rippled through the financial world. This prompted the G10 to create the Basel I framework mentioned in my previous post.

So if Northern Rock would not have had that loan, it would not be able to settle their own outstandings and that would result in other financial institutions getting into trouble too. It has nothing to do with share holders, nothing to do with deposit-holders, but everything with the stability of the financial sector. And that is by the way exactly the remit of the FSA and the Government.


Zaaf

Subprime credit crunch disclosure

Currently the G7 is talking on how to deal with the subprime mortgage crisis. The problem with this is that they are a bit too fast in reacting. Of course, this is to be expected of politicians that want to deal with things immediately in order to get more votes, but there is already a new regulatory framework put in place that started the first of January 2008.

Let me explain what the problem is and how the underlying mechanisms work. When a bank, or any other financial institution for that matter, gives a mortgage to you, it gives you money to buy a house. This is a large amount of money for you, which you're expected to pay back over the next few decades. The chance on you defaulting on your payments is low, but the risk is there for the bank. So in order to mitigate that risk, the bank wants some credit protection in the form of a collateral. This is most likely you pledging to let the bank sell your house when you cannot afford your mortgage anymore.

For every loan a bank gives out, it needs, next to the credit protection, to keep a certain percentage of that loan stacked away to make sure that the bank won't get into trouble if they cannot get their money back of that loan. Currently this is regulated by the Basel Capital Adequacy Accord, or Basel I. This is an accord between banks that set all kinds of these percentages and it has been made into law by the local governments.

Now, in order to lend out more mortgages, a bank needs more money, but that might be hard to come by. Banks, however are generally very clever when it amounts to dealing with money. So what they do is create a special company for one specific purpose, this is generally known as a Special Purpose Entity, or SPE for short. Then the banks take a part of their mortgage portfolio and sell it to that SPE. However, the SPE has no money, so to be able to pay it they issue bonds which are guaranteed by these mortgages. And of course the interest payments on these bonds are covered by the income they get out of the mortgages (e.i. your interest payments to your bank). Typically, an SPE packages together the mortgages into ten or so different tranches, where the top tranche contains the mortgages that pose the least risk and the bottom tranche contains the mortgages that pose the most risk. The bonds from the top tranche have a low percentage payment and a low risk and the bottom tranche has a high interest payment and a high risk. The bottom tranche bonds are also known as junk-bonds. Together they are called Collateral Debt Obligations, or CDO's for short. When the mortgages are sold to an SPE, they no longer appear in the books of the bank, so banks do not have to keep money for them. And adding to that is that the sell of those mortgages gives money to the bank, so they can lend out even more.

The companies that buy these CDO's, or bonds, are mostly banks and other financial institutions. They invest in these bonds and assess how much risk is involved in it. To assess these risks, external rating agencies, such as Moody's and Standard & Poors are asked to provide a rating for a CDO. Based on the rating, the investing company know what the risk associated with that CDO is, and thus how much money they need to keep available for when their investment is lost.

What now happened is that in the lower tier of the bands, people started defaulting on their mortgage payments. But instead of the SPE forgoing on their interest payments themselves, they asked the originating bank to bail them out. And banks do this to save their face. Because if a bank lost the trust of people, they would withdraw their deposited money from it. And when that happens on a large scale, then, according to the fact that banks need a percentage of money for every loan (see above), the bank does not have enough money left to write off their bad loans and then the bank can go bust.

The rating agencies, it seems, did a poor job of rating the risks with the CDO's. Most of the time the rating was to high, meaning the risk associated with it was rated to low.

So that's what's happening now. Banks are bailing out their SPE's and don't have money left to give credit to companies, or to other banks for that matter. And those CDO's that are not bailed out, are defaulted and the investing companies, which most of the times are other banks, have to write them off completely. So they don't have money either to lend out. This is the credit crunch effect and it boils down to the fact that it has become much harder for a company to get credit from a bank.

Now for the fact why the G7 politicians are premature in their assessment that they need to do something about this.

Roughly ten years ago, the global banks realised that the current Basel I accord is too strict and also leads to the SPE situation sketch above. They, combined in the BIS - Bank of International Settlement - created a new Basel accord. The main driver was that the larger banks felt that they were much better at assessing the risk associated with a loan than the standards proposed by the Basel I accord allowed. Under the Basel I accord, if you lended money to BubbleBurst.com had the same associated risk as lending money to Shell. For both loans you had to set aside 8% of the main sum. Banks felt that for BubbleBurst.com they might need to set aside 12% and for Shell only 4%. And internally this is the amount of capital that they calculated with. These things have been set into the Basel II Capital Adequacy Accord, which came into effect per the first of January 2008. In this, banks are allowed to set aside as much, or little, money as they think fit, provided they disclose their risk assessment models upon which they calculate the amount of money set aside to the regulators. And a big part of this information has to be disclosed to the market as well. The idea behind this disclosure is that investors then can decide if banks are taking too much risk or not, which will be reflected in the stock price. The problem is that this disclosure will happen in the next quarterly statement so the effects are not yet visible. A big part of new areas in the accord is what the accord calls Asset Securitisation. An example of a Securitized Asset is a CDO. Banks, under the new Basel II rules must set aside much more money than under the Basel I accord.

So there you have it. There is currently a new regulatory system for assessing risks within banks, which will deal with the Subprime losses in a much more effective way. It also reduces investor uncertainties by ordering banks to disclose how they assess their risks. My personal fear is that, on top of Basel II, the G7 politicians feel they need to do something and come up with extra risk controls on top of the Basel II Capital Adequacy framework.

Zaaf

Bank for sale (II)

The bank I work for is still for sale. The highest bid currently is roughly € 71 billion. I have a lot of emotions regarding the bank being sold off. One of them is pride. I'm very proud to be part of an organization that is being valued so highly. And the value is because of the assets the bank has. Part of that is because we have money on our balance sheet and that needs to be paid for, but mainly it is being paid for the way we do our business. And that is due solely to the employees of the bank. At the end of 2006, the latest released figures, there were 105,000 of them. If you were to apportion the bid of € 71 billion per employee, you'd get:

7.1 * 10¹⁰ / 1.05 * 10⁵ = 6.8 * 10⁵

Or roughly € 680.000,- per employee. If you deduct the group capital of € 45 billion from the offer, which is a questionable thing to do because the group capital is needed to perform the business done by the employees, you get:

(7.1 * 10¹⁰-4.1 * 10¹⁰) / 1.05 * 10⁵ = 2.5 * 10⁵

Or roughly € 250.000 per employee.

Zaaf

How not to fill a printer

Here at the office, we use a nice HP color printer. It comes with three trays for paper, labeled 2, 3 and 4. (Now here is a nice Obi Wan error.) The printer complained that tray 4 was empty and my colleague needed a print. So she got a whole box of printing paper and used a pair of scissors to remove the plastic binding. Then she took a pack of paper, opened it, took roughly one-third of the paper and started counting the trays. It is a good thing that they are numbered, because there are only three of them. When she finally put the paper in tray four, the printer started complaining that tray three was empty, so she put in the remaining paper from the pack in that tray. While this way of filling a printer with paper works, it has several drawbacks. To do it more efficient I'll note them here so I can refer my colleagues to them when they are in need of printer paper filling instructions.

1. The plastic binding on the paper pack box has a self-release built in. Just find the part where it is sealed together, turn it upside-down and pull on the little end that is loose. It comes apart quite easily
2. The printer trays and the paper pack sizes match each other. A whole pack will fit into one tray.
3. Filling the first tray with half of a pack and the second with the other half will not make the printer any faster. It will only run out of paper earlier. Just put a whole pack in each tray.

Enough ranting for today ;-)

Zaaf

On the move

Today, for the third time this year our department was moved to another spot in the same building. I'm sure that the ultimate motive behind these moves is that our company as a whole works more efficient thus benefiting our shareholders, but packing and unpacking boxes everytime does make you wonder if that really can be true. It is not only this year that we've moved a lot. Last year we moved four times over the whole year. And every move costs at least one day.
This means that this year we've spent the following amount of hours not working because of work:

year	times moved	people	lost hours
2006 (whole year)	4	9	36
2007 (ytd)	3	7	21
Total			57

Mmmh, putting it in a table makes it look trivial. It's not even a whole week for this year. Ah well, with an hourly rate of about € 100,-- it still reflects a lot of money. The bright sides of it are of course that a) it provides the moving company a steady income and b) The things I keep at work, books, brochures, printouts of documents are now down to a minimum. Still, I hope that the next move announcement will not come before the third quarter this year.

Zaaf

Bank for Sale

To the tune of "House for Sale" from Lucifer with Margriet Eshuijs and Henny Huisman

Bank for sale.
You can read it on the sign.
Bank for sale.
It was yours and it was mine.
And tomorrow some Scotsman will be doing some sort of deal
In the office filled with memories, we used to share.

So sad.

Zaaf

Doing a LOL at work

As we all know, LOL is a bit overused these days on the web and related parts of the internet. Just Google for "LOL Inflation" and you'll get about half a million hits. In fact LOL is so overused that it is almost meaningless. However in real life it is still possible to laugh out loud. And one of my colleagues just did.

Picture this: Your sitting at work in a large open office space without any noise reduction measures. It is just after lunch and all the talk has quite down with people focussing on their immediate task, like wilfing. Suddenly, someone burst out in a real LOL session. And first thing you see is lots of angry glances being thrown at the source of the laughter. Perhaps we here are feeling too important to be disturbed by laughter?

The second thing most of us wanted to know was the source of the laughter, so we were treated on a very stupid blonde joke. I guess you'd have to have been there.

However the main thing I took away from this is that it is not really appreciated to LOLAW .

Zaaf