Economy & Credit Chest

Once the organization has decided to conduct an internal assessment, leadership must decide what it wants the assessment to focus on.Most organizations look at only one area of the organization: tasks. Some organizations assess employee morale through the use of an employee survey—an example of scanning the organization. But in forming a partnership, both of these areas need attention. I call them the material and ethereal realms of the organization. I use the term realm to describe the degree to which these spheres interact while still maintaining separate energies and characteristics. Let me use an analogy to show how these realms relate to partnerships. On planet Earth, there are two primary realms of existence: the marine environment and the terrestrial environment. While each realm operates independently of the other, the two interact in significant ways. For example, together they affect the atmosphere, which influences all life in both realms. Weather systems are created as the marine environment heats or cools more slowly than the surrounding landmasses and provides the moisture that evaporates into the air.

These systems are then circulated around the globe in a series of geoclimatic patterns that support the life forms that have developed in these environments. It is a system. The different realms of an organization affect the overall atmosphere, too, and thereby affect all other aspects of the organization in the process.

The break-even in the IRR profile of the AAAtranche is a multiple of the annualized historical average loss for BBB-rated corporates (10x in this case). The BBB-class hits the IRR of the portfolio at around 0.9 percent which is 4.5 times the historical average loss. Static synthetic mezzanines normally exhibit a lower rating stability than mezzanine notes of managed synthetic CDOs, depending on the skill of the manager.

Assumption: The 5-year cumulative default rate for BBB is around 1.60 percent, assuming a 40 percent recovery rate. This equals an annualized 0.2 percent expected loss rate. The size of the mezzanine tranches affects the expected loss (probability of loss unaffected). As the size of the mezzanine class decreases the expected loss tends to increase hyperbolically as seen (binomial expansion technique with a diversity score of 55 was used). The ratio of the expected tranche losses to the expected CDS portfolio losses would define the risk leverage. When the ratio is above 1 the mezzanine note has a greater expected percentage loss than the underlying portfolio. The percentage of the first loss class has a major impact on the leverage of the mezzanine class (assuming the same underlying exposure in size.

A lack of sufficiently thorough analysis is common in decision-making. The natural tendency is for people to gravitate towards a particular option, often because of prejudice, fear (especially fear of change), a desire to avoid risk, laziness, or an over-reliance on instinct. We highlighted the importance of carefully assessing the situation, defining critical issues and specifying the decision. These are the first three stages of the rational decision-making process. Combining “hard” factors such as data, technology and information with “soft” factors of intuition, experience and creativity can test potential decisions. It is important to question assumptions and see things from another perspective (such as that of the customer or person most affected by the decision).