Oooh la la - going down with Eurostar Thursday, January 31, 2008

My commute takes me via Waterloo and past the former Eurostar terminal.

On the hoardings that have sealed the old terminal off, Eurostar has posted a series of statistics about the service - no. of passengers, journeys etc. However my eye was to drawn to one today that claimed that 2069 people had joined the half mile under club!

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Novatunes - a galaxy of music stars

I like to try out lots of internet services and sites, especially music ones, and often sign up to beta invite lists of services on the basis of patchy information. Months later an invite can pop into my inbox and I've no recollection of who or what on earth the service is, so discover it all over again.

One such service invite arrived today for Novatunes. The email included a long blurb which I couldn't be bothered to read and so dived onto the site. What I found was a music site that showcases a "select" group of artist for whom Novatunes operates as a promotion and distribution platform. At present, 48 artists are signed up and each has their own profile pages on which they can provide news, bio, photos, tour news and operate a fan site, as well as enabling you to listen to their album via a player on the site. Most significantly they can sell their DRM-free music directly to the consumer, retaining 70% of the proceeds, by-passing the record industry machine.

Clearly this model isn't unique and other sites do something similar. But what does differentiate the site from many is that Novatunes is a) going for a restricted set of artists to showcase for now b) those artists evidently have to make a larger commitment to the site than might be the case with simply setting up a profile pages as they might on say Bebo or MySpace. I say this because several random artist I looked at featured an intro video interview with the artist in which they specifically explained the rationale behind their Novatunes site.

The biggest kick for me though was that one of the artists I stumbled upon was Julia Fordham, who is one of my favourite artists - her track "Love moves in mysterious ways" was the track my wife and I selected at our wedding for the "first dance" because we loved her albums. Complete serendipity to find her showcased on the site and I'm listening to her new album on the site as I write this post.

Glancing at the artist directory, I confess that I don't recognise many of the artist names and nor does it look like chart topping stuff. But these are evidently talented musicians showcasing on a new but well-put together site. Worth a browse round even if you are only window shopping - you should check out Meiko and Julia Fordham as a minimum.

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Tumbleweed spotted in mortgage departments

The Bank of England announced yesterday that that mortgage approvals for house purchases dropped to about 73,000 in December from 81,000 in November, which is the lowest since the middle of 1995. This re-enforces the widely held view that the UK housing market is in a worse state than it was in the 2005 downturn.

This probably reflects a tightening of supply and a fall-off in demand. Mortgage lenders are being more choosy about who they lend to and doing so on harsher terms, whilst many buyers seemingly believe house prices are falling and hence can buy cheaper by waiting.

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Data bits found on the sea bed off Egypt

An undersea cable was severed and another seriously damaged off the Egyptian coast yesterday, probably by ships dragging their anchors in bad weather. The result was that internet services in Egypt were cut off and web traffic in India disrupted with a loss of 60% of bandwidth. Other Gulf States were also disrupted.

Leaving aside the convenience of laying cables together at the expense of exposing them to a single geographical hazard such as the one above, it prompted me to consider our dependency on the telecoms infrastructure which we so easily take for granted.

Broadband consumers (individuals or companies) have no control over how they are supplied and even if they did, there are so many other telecom companies involved in the infrastructure chain when considering the internet that no one can offer assurances over reliability of service. The internet was specifically designed to operate in a de-centralised way, able to route traffic through a myriad of routes between the same two points. Yet in practice, telecommunications physical infrastructure can seemingly have single points of failure.

In answer to the question, "do you have in-built fail-over or backup" a response of "yes, we have two separate cables" ignores the fact that they are co-located, rather like a back-up server sitting next to the production server.

A similar situation occurred on 9/11 when much of downtown New York's telecommunication network failed due to the close proximity of the switches to the World Trade Centre and which were destroyed in the terrorist attack.

At this point, our huge dependency on internet based (and telephony) services is fully exposed. In yesterday's example, India was affected and yet it is a key off-shoring location that can be hit with damage to a couple of cables. Everyone takes for granted that the international telecommunication system is resilient and granted there is little we can do about it if it's not. However, leaving aside the reality that it is impossible for a company to properly test, I wonder how many companies backup/DR plans can genuinely deal with such incidences and sustain the inter-dependency of their international operations?

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Don't blame it on the sunshine, blame it on the Bayou CFO Wednesday, January 30, 2008

Reuters reported yesterday that the former chief financial officer of defunct hedge fund Bayou Group was sentenced to 20 years in prison for his role in a scheme that defrauded investors of USD450 million and led to the fund's collapse. The executive, Daniel Marino, pleaded guilty in September 2005 to conspiracy and three counts of fraud. At a hearing in US District Court in Manhattan, Judge Colleen McMahon ordered him to begin serving the prison sentence immediately. The fund's two founders -- Samuel Israel III and James Marquez -- have also pleaded guilty. Marquez was sentenced last week to four years and three months in prison and ordered to pay USD6.25 million in restitution. Israel awaits sentencing.

What a contrast - the founder got four years versus twenty for the CFO.

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Jack of all trades

I met up with an old friend yesterday who I regard as one of the most knowledgeable chaps in middle office processing and infrastructure in the investment banking space. He can bore the Europe on reference data, corporate action and broking operations, as well as related IT.

Inevitably we chatted about the SocGen debacle and agreed it was incredible how so many controls could have been skipped without the collusion of management.

Yet one other troubling aspect more generally applicable to capital markets firms is that so few people inside firms genuinely understand how things fit together - controls, processes, data and systems. At one time firms benefitted from being of a size and organisational structure that enable people to have a holistic view. In my own case, I was fortunate to work across asset classes, control frameworks, systems and processes backed up by strong financial/accounting skills. Today, such opportunities are almost non-existent thanks to business scale and the silo product and department structures which preclude anyone from building up a broad understanding.

This enormous deficiency helps explain why the ramifications of an issue often aren't fully understood - people simply lack the big picture and awareness of inter-dependencies of systems and controls. This is amplified when one adds in geographic segregation, leading to cells that focus solely on a product/region/function and where straying across battle lines is frowned upon or indeed actively discouraged.

The "experts" with this knowledge still exist but don't easily fit inside the cell structures. They are frustrated and the organisations struggle to find them a home. Labelled as "jack of all trades", they usually had significant mastery of the accompanying detail and were formerly the glue that ensured cohesiveness. The absence of future generations of Jacks does not bode well and the ramifications are only now manifesting themselves.

I'm sure mine is not the only industry to be suffering from this problem.

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Hunkering down for a recession

Many conversations I've been engaged in during the past couple of months have, at some point, turned to the topic of a recession. Be it concerns over job security, bonuses, property prices or the prospects for businesses, people are increasingly worried about the future. Buffeted by increases in the cost of living e.g. food, power and transport costs, and income constraints, a growing number of households are contemplating "belt tightening".

Generally a household has three options to maintain their current standard of living
When these options are unavailable or unpalatable, some thing has to give and living standards / expenditure have to be curtailed. For many "professional" parents one sacred expense is school fees, given the perceived and real consequences of a child transferring schools.

Thomas Cook today announced that foreign holiday bookings remain strong, despite a 2% fall in bookings over last year. Yet this is undoubtedly one of the first items to be cut or scaled back given its discretionary nature. Nonetheless, Thomas Cook also revealed it has scaled back capacity this year primarily to trim its costs, but commentators also suggested it was linked to expectations of failing demand and likely changes in spending patterns.

The biggest challenge right now is optimism or lack thereof. When people are optimistic they will engage in more speculative endeavours and spending. However, talk of recession can effectively become self-fulfilling as people hunker down and prepare for adversity. This applies equally to individuals and companies. Projects and investments get cancelled or fail to gain support, discretion spending is rained in and purchases may be downgraded or delayed. People hoard cash and avoid making investments, whilst banks restrict lending via changes in lending criteria and higher rates.

How can this gloomy mood be lifted? That's the challenge facing policy makers right now. Sadly the Government can't rely upon national success in football as the home nations failed to qualify for the European Championships. Ho hum.

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If you can't beat em, buy em Tuesday, January 29, 2008

In a huge corporate u-turn, some have described as hypocritical, Ticketmaster in the UK have bought secondary ticket exchange Getmein. This follows a purchase of a similar business in the USA this month by Ticketmaster USA.

Ticketmaster had made strong representations to the UK Government Select Committee in the Summer arguing it should legislate against such ventures. That Committee declined to make such recommendations in its recent report.

So, following the flop of its Ticket Exchange venture that ensured people could only sell tickets at a loss, they've evidently had a sudden change of heart.

This raises an interesting scenario. Thanks to exclusive deals with many venues and promoters, Ticketmaster control some of the ticket supply to popular events. So what precludes them from releasing such supply directly into the secondary market and profiteering on their own account? Whilst they may be separate legal entities etc it would be staggering for them not to cross sell, especially with 4 million registered customers known to want tickets.

Perhaps this is part of the start of an awakening to economic realities and market models by Ticketmaster.

It will certainly be interesting to see if they sign up to the Music Manager Forum backed initiative that seeks to impose a levy of 15% of revenues on secondary market operators.

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Price depends on context

The London Paper reported today that the US star Moby only made £5 during 40 minutes of busking outside Slone Sq tube last night. Filmed as a stunt by BBC's Culture Show, it highlights how context and setting massively influence price or more specifically perception of value.

Why pay more for the same beer in a plush wine bar than a local pub? Why did Moby get such measley tips when his concert tickets are probably £30 per seat?

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It cost more, so it must be better

Lightspeed Venture Partners Blog have a post here about a study in which students were given five wine samples to taste and rate. Each had a price label attached to them, but in fact only three different wines were given i.e. two wines given twice but with different prices.

Sure enough, the students opined that the wines were all different and improved with price.

Sometimes, being cheapest seems the best strategy but charging more can differentiate you and imply higher quality to consumers. Not a new revelation, but certainly worth repeating from time-to-time as so many companies seem to forget it.

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Murdoch joins Virgn Mile High Club

It seems BSkyB has been screwed by the UK Government order that it cuts it's 17.9% stake in ITV to less than 7.5%. This comes only a week after Labour supporter Richard Branson, a British tax exile, flew to China with Gordon Brown (British Prime Minister) and whose Virgin Group had been frustrated in his attempt to buy ITV.

The grounds cited were that the stake resulted in a substantial lessening of competition within the UK market for all television. It also enforced a ruling from the Competition Commission last month.

Two specific points of interest. Firstly, the ruling that 17.9% constitutes a "merger", rather than an investment stake, which accounting rules traditionally consider it and which would have considerably ramifications if applied more widely. Secondly, ITV shares have almost halved in value since they were acquired by BSkyB and could be driven lower by an enforced sale, so they may have a reasonable claim for sizeable damages.

As it happens, since that same trip the Government have also announced an astoundingly generous offer to guarantee bonds issued by Northern Rock, which Virgin wants to buy. So perhaps Murdoch isn't the only one who was screwed on the flight.

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SocGen - its gross how things fall through the net Monday, January 28, 2008

Ever told a little lie, but then found yourself in a spiral of more deceit as you seek to preserve or cover-up the initial one?

I find it hard to tell at this point whether the only person that was locked into such a spiral was SocGen "rogue" trader, Kerviel. This is a strong assertion, but each time a new pronoucement is made to add to the story, it becomes more incredulous. Yesterday, for instance, it was announced that:

Though he was only supposed to buy futures – bets on the direction of European markets – if they were covered by a hedge – a similar position limiting any loss – he used other people’s access codes and “falsified documents” to create fake hedges, leaving the bank exposed to the full downside.

SocGen said he had evaded detection for almost a year by only choosing “very specific operations with no cash movements or margin call and which did not require immediate confirmation” and by constantly switching between different types of instrument.

By January 18, when he was finally caught, he had positions worth €30bn on the Euro Stoxx, an index of Europe’s biggest companies, €18bn on Germany’s Dax and €2bn on the UK’s FTSE.

So the Bank is disclosing that Kerviel's job was to seek to make profits by carving out off-setting positions (hedge position) that limited the possible profit or loss that would arise from market movements. Such positions would be created from two assets that were assumed to be close, if not perfect, substitutes for each other. For example, one could buy futures to create a long exposure profiting from the market rising and buy put options that would allowing you to sell an equivalent exposure with a strike price below the current market price, termed "out of the money" options.

Such a structure might look like this
In risk terms, the Bank's maximum price exposure would be deemed to be the loss of 10 and it is this on which Kerviel might have been monitored. However, if the option contracts were fictitious then the Bank would be fully exposed to the market movements. The use of purchased options would be consistent with the assertion that no margin calls were involved, but it would normally involve payment of a premium and exchanging confirmations of the trade with a counterparty to independently verify the existence of the trade.

So, another instrument possibility might be a performance or total returns swap. These trades are stuck directly between two counterparties rather than on an exchange. They agree to pay each other the returns on nominated assets. For example a simple example is where one counterparty agrees to pay the interest on £5bn in exchange for receiving the "returns" on the market from the other. The respective payments on such swaps might only occur quarterly, with no initial outlay. More importantly, the confirmation of such trades can be flaky since they follow no standard process. This type of trade would certainly fit with the comments in the press reports.

Again, from a risk perspective, provided the notional value of the swap offset the futures positions, they might have considered Kerviel to have a "flat" position. That is not to say that other risk questions would have arisen such as the exposure to the counterparty and their credit worthiness.

Importantly, such deals are precisely the areas that SocGen excelled in and traders would have been encouraged to engineer both to satisfy client demand and create "risk free" trades that generate profit.

However, this doesn't overcome the challenge for Kerviel that every trade should be confirmed independently of the trader with the counterparty and controls should be in place to chase up outstanding confirmations. The reason for such controls is precisely to address the risk of incorrect or fraudulent transactions being booked. The absence of such confirmations will normally prompt investigations and reversal of uncollaborated transactions.

However, one important element often missing from risk environment is properly dealing with backdated or cancelled trades. Inside many firms, risk reports are produced daily reflecting what happened yesterday or positions at right now. As such, one possible vulnerability is that a trader cancels a historic trade booked 30 days ago and replaces it with another that is 10 days old. The risk team wouldn't care about this because their systems would be unlikely to flag up that this created a historic position, since the current position is fine thanks to the newer trade. However, a middle office function would be required to investigate a 30 day old trade that hadn't been confirmed would be investigated. But cancelling such a trade would almost certainly halt the investigation and the 10 day old trade wouldn't yet warrant attention until later. In such a scenario, everything hinges upon the controls over cancelling and rebooking trades. Unfortunately, human failings means booking errors can easily and regularly arise, leading to complacency, with the result that controls over rectification of such"errors" are usually the laxest.

Obviously, more pieces of the jigsaw will emerge over coming days and weeks that will improve our understanding of the complete picture, but as the last few posts may have illustrated, there are always weak spots in any impregnable fortress.

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SocGen - operations and risk managers rejoice Saturday, January 26, 2008

Skyping with some old colleagues last night and talk was how Ops, IT and Risk in banks are quietly smiling following the SocGen debacle.

Who will be able to refuse their requests for more headcount and systems spend when they cite control requirements and backlog issues? At the very least, it will be a brave COO or CEO that tries to cut spending in such areas. Moreover, spending requests won't have to point to specific returns on investment but instead will be able to hint at or cite potential "losses" from weak controls.

With inevitable pressure from regulators to ensure firms have appropriate levels of controls and qualified staff to handle business volumes, no firm will want to face imposed constraints on business volumes because of perceived "back office" issues. Likewise, some CEOs may find themselves having to learn more about middle offices practices than they ever wished and undoubtedly finding lots of practices they suddenly don't like - "what do you mean, we don't get clients to sign agreements before trading with them?"

As for IT vendors, you can be sure they will be reaching for the sales literature to ensure it emphasises "strong control framework" is an integral feature of their offering.

A big scandal is always good for business!

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SocGen - a sprinkle of hundreds and thousands

In the FT today,

Jean-Pierre Mustier, head of corporate and investment banking at SocGen, gave more details of the methods Mr Kerviel used to evade the banks’ controls.

“Every two or three days, he was changing his position. He would input a transaction that would trigger a control in three days and before that happened he would replace it with a different one,” said Mr Mustier.

He said the rogue trader was managing hundreds of thousands of concealed trades and an equal number of falsified hedges to give the appearance that any loss was offset.

Ok, so most banks are easily able to upload/import huge volumes of trades into the sales trading systems from spreadsheets and the like, simply because this is how most clients send in program trades. By keeping the value of each one relatively small, they may have kept below transaction limits. However, most traders have position limits that they have to keep within and his daily turnover would have been immense if he was rolling these positions every few days. If the control functions weren't alerted by his activity, I'm surprised a desk head wasn't chatting with a trader who was doing so much business.

From the reference to a "three day" control, it might be that SocGen operated a timetable such as
Here's where the "lone gunman" assertion looks very peculiar. It seems inconceivable that someone in one of the teams, particularly client services, had never sought to speak to the client especially one who never paid their margin calls. Whilst the trader would have been consulted, it would be highly irregular for these teams to accede to a request that all communications with a client were routed through a trader.

Kerviel would have also been sitting in a trading room surrounded by colleagues. Usually prop traders work in teams and so SocGen are effectively suggesting that Kerviel was conducting all these activities in full view of his colleagues. Admittedly a colleague sitting at a keyboard all day, playing with spreadsheets etc is completely normal behaviour for a trader.

In the Nick Leeson case, he was booking trades to an error/suspense account. Most banks have controls over opening accounts [documentation required, several internal authorisations] and classify accounts to which trades are booked as House, Exchange/Market and Client. One way round this is to make use of previously little used or dormant accounts. However, Suspense/Error accounts in each of these categories are normally closely inspected but even if they were only checked every few days, the volume of trades assigned by Kerviel to such accounts, if he was using this approach, would have been enormous. Moreover, the account balances would have been sizeable and warranted attention. I should acknowledge that, sadly, a consistent pattern of activity or balance can lull people into a comfort level that things are "normal", whereas eractic fluctuations or activity draw suspicion.

Again, all the above is conjecture on my part, but the story coming out currently is very flimsy and it's a risky PR strategy.

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Warner believes you can search but you can't hide Friday, January 25, 2008

I was saddened to read on Techdirt today that Warner Music is suing Seeqpod, an increasingly popular search engine for music. Seeqpod don't host any music but do make it remarkably easy to consume music hosted legally or otherwise elsewhere.

In many respects, were Warner to be successful they would clearly have a case against all search engines, unless the case rested on the playing facilities provided by Seeqpod. USA Search engines have been able to rely upon safe harbour provisions to protect them in the past. However, as with any threatened legal action, the anticipated legal costs can force most small firms to capitulate.

Last year, I had the opportunity to briefly get to know some of the Seeqpod team including one of the founders, Kasian Franks. An impressive group of folks, it will be a great shame for them to be bullied out of existence.

UPDATE : Was just skyping with Kasian, who suggested that the Computer & Communications Industry Association (CCIA), whose members include many of the big names in the computer industry including Google, Microsoft and Yahoo with their big search operations, may support Seeqpod with its defence. He confirmed to me that Warner's focus is more specific than search - it's that Seeqpod offer playable search i.e. Seeqpod made it easy to consume the found items. I think that is the real issue. Why bother going to last.fm even with its new offering when you can go to Seeqpod and listen on an unfettered basis.

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Bill Gates last day at Microsoft

Video shown by Bill Gates at CES 2008 - all star cast.

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The SocGen fraud - the real story.....perhaps

Fraud –noun
1.deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.
2.a particular instance of such deceit or trickery: mail fraud; election frauds.
3.any deception, trickery, or humbug: That diet book is a fraud and a waste of time.
4.a person who makes deceitful pretenses; sham; poseur.
Source : Dictionary.com

As it stands, SocGen is maintaining that their rogue trader, Jérôme Kerviel, appeared to have acted alone and does not have appeared to have operated for personal financial gain, albeit his motives have not been determined.

The notional futures positions taken by Kerviel are reported as being as high as EUR60bn. For those less familiar with these instruments, it is worth explaining that when investing in exchange traded futures, one doesn't have to pay for the full notional value but instead one normally has to a) pay an initial deposit, commonly 5-10% of the notional value which is termed initial margin b) immediately pay to cover any losses but with the benefit you can also be paid any profits. The central function in the market (clearing house, which is like the central banker) collects these sums from the brokers that have positions in the market and the brokers in turn collect these sums from clients or their own funds.

So, SocGen would have had to pay the clearing house the initial margin on the positions or deposit collateral. In turn, the reported positions in client accounts should have been covered by say EUR6bn of initial margin, which would have been demanded in either cash or collateral (high quality assets such as treasury bonds). This sum might have been lower based upon
To achieve this, Kerviel could have manipulated the account static data and, say, set high credit limits for the accounts he was using, thereby eliminating/reducing the calls for initial margin from the "client".

But assuming he couldn't eradicate all of the initial margin requirement and had to fund losses, some other wheezes, in order of ease, might have been
I should mention at this point that my familiarity with these things stems from work I've historically undertaken designing and operating control systems to prevent such activities. Traders wouldn't be allowed access to the functions above, but the bank has already made clear that Kerviel had borrowed passwords from other people to pursue his activities. These could have been other traders, which could have enable him to process trades above his authority level or old colleagues in the middle office (control and processing function), giving him access to the above functions.

Of course, speculation on what happened is somewhat pointless. But it's fun isn't it? So, what might have prompted this behaviour? There are at least four possibilities:
The investigation will inevitably take some time [investigating accountants get paid by the hour, so why rush such an important assignment]. Seeking co-conspirators will inevitably be part of that work, as well as determining whether assets were extracted from the bank.

One thing is certain - other banks won't be smug. They all fear the rogue trader and pray that their control systems can withstand/prevent it from happening from them, but know that few systems are perfect especially if collusion between staff occurs or lapses in control procedures occur.

But one mystery remains - the size of the positions. Everything above makes sense in the context of a few tens of millions, even a few hundred million. But 60bn. That is a serious position to have to hide in the books and to cover up. All of the actions I described would have to be on a massive scale for no one anywhere in the Bank to spot increases in the basic financial ratios or absolute values. You just can't have such sizeable discrepancies on reconciliations without there being panic; Clients are going to notice such large amounts missing from their accounts; somebody on the funding and collateral management desk has to notice the significant shortfalls or changes in activity.

SocGen is a big player in the equity derivatives space. However, no "client" could carry such positions even across multiple accounts without some scrutiny on a daily basis. The commission generated from related trades would make the "client" worthy of senior management attention. And if these were House accounts, somebody in the risk department must have been tasked with inspecting them.

So something isn't right here.

An alternate scenario doing the rounds is that the bank made some big strategic bets that went horribly wrong. However, it would be hard to keep that secret and certainly after the event with everyone looking to disassociate themselves from the mess.

Regardless, there are some in the USA who are angry/anxious/nervous that the impact of SocGen unwinding such sizeable positions may well have exacerbated the market falls that kicked off in the Far East and thus bounced the Fed into a rate cut of 75bp. This ignores that the market had already priced in such a cut and so at worst it may have brought it forward a week. Nonetheless, this may cause some friction between the USA and France.

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Monoline insurance - goes around, comes around Thursday, January 24, 2008

You can't make this stuff up.

The New York Insurance Superintendent has asked banks to stump up about $15bn in capital, with a $5bn down-payment, to bail out the monoline insurance which face ratings downgrades. The threat to the banks being that if they don't pay up, then the resultant rating downgrades will force the banks to have to write down the inventories.

So banks hand over funds, at a time when their own capital positions are weakened, and their inventories preserve their value. Meantime, the bond issuers continue to pay the Monoline insurers for cover they would otherwise struggle to provide.

It hasn't been determined whether the contributions from banks should be linked to their exposures to the monolines. So banks with the most to lose may have to pay the most.

But equally ironic - news of a possible bail-out sent share prices for both Ambac (up 70%+) and MBIA (up 30%+) soaring, making any potential investments more expensive.

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Tribewanted - online communities going native

Tribewanted completely passed me by until I stumbled across an article trailing a BBC2 observational documentary series about the venture entitled "Paradise or Bust".

Tribewanted describes itself as a unique community tourism project that is simultaneously based on Vorovoro Island, Fiji and online.

According to the website, Tribewanted was founded by Ben Keene and Mark Bowness in April 2006. Mark was a 26 year old serial social networker in search of the next level of the internet revolution. Ben was a 26 year old serial ‘gapper’ in search of the next level of adventurous travel. Mark emailed Ben with his idea of finding an internet tribe and building a unique on-line-on-island community. Ben said ‘ok, let’s do it’. Mark has since moved on from Tribewanted to pursue his next online dream while Ben continues to run the tribe today.

The idea was to create an online community of 5,000 members who form a tribe and then fund the development of a tribal "home" on an island in the Pacific, with each member spending between three and twelve weeks on the island. Members would get a say in the running of the island during the three year life of the project and remain in close context with other tribal members via the online social network.

An island in Fiji was chosen and rented for 3 years and the first episode of the BBC programme followed the project from the first landing on the island and the set-up of base camp, through to the arrival of the first tribe members. It covered the travails of recruiting online members, a process beset by online accusations that the whole scheme was a financial scam, and warning people not to part with the £300 to join.

It was fascinating to watch and see the youthful optimism of the founders, impatient for success, hit the realities and slow pace of Fijian life. Likewise, the scheme was hugely dependent upon attracting a large membership to cover the setup and running costs of the island venture, and they hit financial difficulties very quickly because of a shortfall in numbers. Even today, only 1,300 of the hoped for 5,000 have been signed-up, of which 400 have already been to the island with ages ranged between 4-63 years old.

If you missed it, worth checking out via BBC Online and their (awful) iPlayer.

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Gordon Ramsey meets real life David Brent character from the Office

I wandered into our family lounge last night to find "Ramsay's Kitchen Nightmares USA" on the TV. As a rule, I loathe Gordon Ramsey whose manner I find bullying and aggressive. Hence, this would normally prompt me to change channel immediately but annoyingly my wife had control of the remote and she was keen to see the show, based on the "violent" show trailers.

Gordon Ramsey aside, the show quickly captured my attention for one reason - the restaurant manager, Mike, was the spitting image of Ricky Gervais and was a real life version of David Brent. It was hilarious, especially as the guy had several "emotional" and erratic moments, including crying when he saw the restaurant makeover and having a loud hissy fit argument in front of the dinner guests.

You can watch the show if you missed it online at Channel4.com - its entitled "The Mixing Bowl" and is episode 2.

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Mon Dieu - SocGen gets hit by rogue trader

SocGen has just reported that it has uncovered a "fraud" by one of its traders which will have a €4.9bn ($7.16bn/£3.1bn) negative impact on the group, France’s second-largest listed bank. The Bank's shares have been suspended.

Apparently the London based trader, who worked in Equity derivatives, took some massive bets over a number of months on European Share Indices that went horribly wrong. Amazingly he was using plain vanilla futures and covered up his trail with a series of fictitious transactions, which he was able to conceal because of his familiarity with internal controls from his past employment in the Middle Office.

Yikes. That is a serious loss of internal control.

SocGen press release is here

UPDATE : Hurrah. The latest rumour is that the trader is apparently Paris based and not London.

UPDATE : Confirmed by the FT. The rogue trader is Jérome Kerviel, a Frenchman in his thirties who joined SocGen in 2000. He worked for three years in the bank’s back office before being promoted two years ago to the Delta One trading desk, handling proprietary deals in futures for European stock indices. He was based in SocGen’s Paris headquarters at La Défense.

The bank said it had no more exposure to the trader’s positions, which were identified and analysed on January 19 and 20 and then unwound just as stock markets crashed unexpectedly around the world on January 21

Jean-Pierre Mustier, head of investment banking who had been seen as a potential successor to Mr Bouton, said the position occupied by the rogue trader was only expected to generate €20m of revenue a year. “The specific pattern of his transactions was that they used fake transactions rolled on a permanent basis,” said Mr Mustier. The fraud was discovered after the trader made an error with a fictitious counterparty. Its extent became clear over the weekend, when the bank‘s management interviewed Mr Kerviel.

SocGen said that Mr Kerviel was responsible for trading futures on European equity market indices, and had taken “massive fraudulent directional positions” in 2007 and 2008, many of which had made a profit in 2007. It was positions he had taken since the start of the year that caused the losses.

Asked why it had not revealed the details of the fraud earlier, Mr Bouton said the bank could not have brought charges earlier because if it had done so, the scale of his exposure could have leaked, with serious consequences for the company and the wider market.


The timing of the unwind was either incredibly unlucky or simply kicked off or added to momentum in the market. Interesting that this reportedly junior prop trader trading vanilla index futures with only two years of experience was expected to be able to generate €20m of revenue a year. Mr Kerviel’s annual salary - including bonus - was less than €100,000.

posted by John Wilson @ 8:42 AM Permanent Link ,

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Turning recruitment upside down Wednesday, January 23, 2008

I received an email yesterday from a business acquaintance I haven't seen in sometime inviting me to a new service in beta yesterday. I skim read it and initially thought he must have spammed his contact book accidentally - "Oh God, another social network thingy to maintain" and put it to one side.

Then I read a post on Techcrunch tonight referring to "Notch Up" and all became clear. It's an inspired idea for the recruitment space designed to lure out candidates that might otherwise be inaccessible to the market because they aren't looking to move.

In short, individuals set a fee for which they are prepared to be interviewed. Only companies genuinely interested in seeing them will pay the fee, which filters out tyre kickers and time wasters. You can also filter out recruitment agencies and headhunters from approaching you.

For the individual, you get the feel good factor of someone paying you a fee simply to see you and the morale boost that they must really be keen. For the companies it tempts out the in-situ employee.

In reality, and similar to the housing market, I think everyone would move for the right price/role if it were offered to them.

It has been well positioned, since there's no downside to the individual of participating. However, I'm sure the person that sent me the invite may have been motivated by a 10% finders fee on any interviews resulting from people they introduce. Moreover, I suspect this may kick off a wave of spam unless there are some inbuilt restricters in the service to avoid duplicate invites being sent.

I love it when traditional ways of viewing the world or doing things are simply looked at from a completely different angle and the result is ingenious in its simplicity. Obvious but brilliant.

posted by John Wilson @ 9:42 PM Permanent Link ,

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I'll show you my LinkedIn network, so why hide yours?

I confess to being a reasonably active user of LinkedIn for several reasons

- provided everyone keeps their own contact details up to date, it provides an easy way for me to keep my address book updated when people move roles
- it uncovers relationships I would otherwise have never been aware of between people I know
- it helps me to develop new business relationships via warm introductions

There are many features I wish it had such as highlighting to me via a volume ranking those people who are known to many of my contacts, but whom I am not connected to - implication being it is probably someone I should meet/talk to. Likewise, something akin to the Facebook friendwheel and TrustedOpinion facilities would be most useful in highlighting relationships.

However, the one thing I don't understand though is why people keep their LinkedIn contacts/network secret. Ultimately everyone on LinkedIn has chosen to publicly post their details. It's also a networking site, which usually mean that people are making themselves available to be approached. Moreover, in accepting an invitation from someone it usually means you aren't ashamed to be associated with them and hence it can go on public disclosure.

Whilst there are no prizes or glory in having many contacts, I am intrigued by who people are connected to and it often sparks new conversations. Moreover, people who can facilitate introductions to the mutual benefit of those introduced will always be valued.

So what is the rationale behind hiding your network?

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Where there's muck, there's brass...and video, internet and music

Copying an idea from Paris and parts of Japan, H2O Networks is proposing to provide ultra-fast broadband connections in the UK via the sewer network using innovative cable technology, with cables that are pulled through the sewers. Initially targeting three locations (Dundee, Bournmouth and Northampton), they are eyeing up 15 more towns/cities.

The big advantage to the approach is that it avoids digging up roads/pavements, thereby shaving 70-80% of the cost of the alternate. Only installing the connection from street to property involves any disruption.

This makes enormous sense in time and money terms, subject to the water companies being reasonable.

It may also explain in future why there is much more sh*t on TV than there used to be. And no I am not taking the .......

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When is a complement still theft?

Most Facebook users have probably heard of the Facebook application that allows you to play scrabble. It has rapidly become one of the most popular and regularly used applications on the social network. Unfortunately, the developers did not seek or get permission to replicate the game from its owners.

As a consequence, they have recently been issued with "take-down" notices from the toy companies who are asserting their ownership rights.

There has been much debate both in the mainstream press and in the blogosphere about why the companies that do own these rights are being near-sighted in closing the application down given the enormously positive benefits the Facebook version has generated in terms of re-popularising the game.

Whilst confessing that I have generally been someone that manages work programmes by forgiveness than permission and acknowledging that the two developers would have found getting permission upfront from the toy companies an impossible tasks because of a) the corporate bureaucracy they would have faced b) the huge credibility issue of being a non-corporate dealing with a multi-national and hence not taken seriously, it is patently clear that these developers have profited from copying an established game.

For the owners to have allowed such blatantly copying to persist would have been negligent on their part eg they already licenced electronic rights to the game to someone, who should reasonably expect them to protect the rights for which they have paid.

That they have sought to force the developers to give up their "innovation" for a pittance or on "harsh" terms is judged by many as being unfair. Yet, how else are they to set an example of "don't stray onto our property". That this may be a wake-up call to these companies and that they perhaps should engage with such developers to extend their offline offerings is unquestioned, but the alleged complement of copying the scrabble game is still theft of intellectual property.

UPDATE : Someone kindly reminded me via IM that the Scrabulous logo includes a trademark sign - obviously the developers were concerned about other passing off their good name and idea elsewhere. As if anyone would indulge in such practices.

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The price of doing nothing

A few years ago, I assisted a large institutional fund manager with a programme to upscale their derivatives processing capability to enable them to use such instruments in the mainstream of their investment activity.

Whilst hedge funds had been using such instruments for some years, the big established fund managers had traditionally shied away - ignorance, fear and inability were factors in this. In many respects this particular fund manager was actually ahead of its field in taking an active decision to invest in facilities to bring on such capabilities.

Notably, rather than being young gun fund managers wanting to play with "new toys", the pressure for use of the instruments was coming from the Chief Investment Officers ("CIO"), under pressure to improve investment returns.

One particular "speech to the troops" from the Fixed Income CIO stuck in my head. He forceably explained that traditionally his teams could only hold long positions in bonds as shorting bonds was a very onerous process. Hence, they could only invest in companies where they had a view that the companies credit position would under-priced if they were to benefit from upward prices. Yet the returns from this were rarely significant eg a bond price might move up by a few points. In contrast structural limitations meant they could not benefit from selling bonds they did not own in companies whose credit position they thought would worsen - these offered the biggest returns since bond prices for default bonds will drop dramatically.

By allowing the funds to "buy" credit protection via credit default swaps on specific companies or indeed credit indices, the funds could enjoy the returns from a decline in the perceived creditworthiness of a company or the whole market respectively.

The credit crunch has dramatically demonstrated this opportunity. As reported in the Financial Times today, the iTraxx Crossover index, tracking the cost of protecting European non-investment grade credit against default, is up about 40 per cent since the turn of the year. The equivalent US index, the CDX, shows a similar spike.

Actual default rates are yet to change, but the market is currently terrified of corporate credit worthiness and so is pricing in an expected increase default rates and so price of CDS insurance against such defaults has soared benefiting funds hold CDS protection.

As the FT highlights, with one-year protection on the Crossover at close to 500 basis points, it implies default rates among European junk issuers of about 6 per cent by the end of the year – double most banks’ internal estimates, which in turn are about triple the present level.

In contrast, 18 months ago similar protection could trade between 50-100 basis points. Juicy returns indeed.

For those fund management firms that didn't invest in structural capabilities to trade derivatives, these investment returns were foregone. Of course, the fund managers still have to back the right horses and so anyone "selling" CDS protection will be sitting on big losses. However, fund management executives that failed to position themselves by doing nothing should be judged accordingly.

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CDS - When the music stops, we may not even be able to afford the chairs Monday, January 14, 2008

When you buy insurance, you generally assume that the insurer has the means to payout in the event of a claim. Actually most people probably never even go so far as to consider the matter and if they did they may rely either on it being a regulated market or that they will only have a small claim against a financial colossus.

Bill Gross of Pimco*, who runs the world’s largest bond fund and one of the most successful by some measures, compared the CDS market with that of a pyramid scheme in his January investment note. Whilst technically a swap market, credit default swaps economically look like insurance and in essence he questioned whether the CDS market was capable of paying out potential claims to those down the insurance pyramid.

In his back-of-the-envelope calculation he projected that the losses from CDS caused by a rise in bankruptcies could be $250bn or more. His calculation assumes that the corporate insolvency rate would return to a normal level of 1.25 per cent (measured as the default rate of all investment grade and junk debt outstanding). As the entire CDS market is worth about $45,000bn, $500bn in CDS insurance would be triggered under this assumption. The protection sellers would probably be able to recover some of this, so the net loss would come to about half of that ie 250bn. On this scale, he suggest there will be sizeable defaults which will not only hit current protection buyers but also deter future buyers. "Pyramid schemes and chain letters collapse because there is no more credit to feed them."

This would have enormous consequences for the whole financial system undermining confidence in instruments designed to disperse risk and curtailing banks ability to offer the same magnitude of credit since their ability to trade it on would be diminished.

posted by John Wilson @ 4:21 PM Permanent Link ,

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If it's broken, you'd better fix it - EMI

Today's FT carried an interview with Guy Hands of Terra Firma on the subject of EMI.

Amongst several stats trotted out, one section stood out for me:

Mr Hands also hinted at a clear-out of EMI Music’s roster of 14,000 artists, saying just 200 of them made most of its revenues.

About 85 per cent of artists lose money for their labels, he said, and EMI spends £70m a year subsidising the 15 per cent who never produce an album. The group has exceeded marketing budgets by about £60m a year, he added, and wastes £25m a year scrapping unsold CDs.

Leaving aside artist productivity and profitability, most businesses try to convert their "waste" into some scrap value, be it returned newsprint or whatever. That they have to destroy CDs is bizarre - why not get someone to come and take them away for instance.

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