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.

The success or failure of a decision frequently depends on the delegation process. Empowerment, which is discussed below, goes beyond the delegation of specific tasks. It involves granting a defined level of authority and responsibility within which someone makes their own decisions and implements them.

There are several stages in the delegation process.

Preparing to delegate. Some preparation and planning are always needed, perhaps limited to gaining the approval of others or simply informing people. Priorities may also need to be considered. Most of all, you should be clear about the reasons for delegation and what it is meant to achieve. This requires a focus on results and having clear, precise objectives.

Matching person and task. The person who is required to do the job must understand it and have the personal skills and competence to have a realistic chance of doing it successfully.

Discussing and agreeing objectives. Targets, resources, review times and deadlines should be discussed with the delegatee and agreed. It may be necessary to formalise the process in writing in order to avoid, or at least minimise, any misunderstanding.

Providing resources and the appropriate level of authority. When delegating work, it is imperative to provide the delegatee with the necessary resources as well as the authority to complete the task, and then to provide support when needed.

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).

• Brand management
• What is the purpose of the brand? What values does it need to emphasise to customers?
• How can the brand be used to greatest effect?
• Is sufficient attention given to building and publicising the brand?
• Is the brand used consistently?
• Is the product in the best part of the market, or is repositioning needed?
• What is the best way to appeal to customers? How should the product be sold?
• Avoiding a head-on confrontation with the market leader is often a wise course. Is this happening, or are you in danger of waking a sleeping giant?
• Is a simple, consistent and compelling message being used to sell the product?
• Do you measure the profitability of customers?
• Are you targeting, attracting and retaining the most profitable customers?
• What plans are in place to keep customers loyal? Are they appealing to customers and difficult for  competitors to copy?