Theory and practice of planned, systematic change in the attitudes, beliefs, and values of the employees through creation and reinforcement of long-term training programs. OD is action oriented. It starts with a careful organization-wide analysis of the current situation and of the future requirements, and employs techniques of behavioral sciencessuch as behavior modeling, sensitivity training, and transactional analysis. Its objective is to enable the organization in adopting-better to the fast-changing external environment of new markets, regulations, and technologies.
An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days.Commercial paper is available in a wide range of denominations, can be either discounted orinterest-bearing, and usually have a limited or nonexistent secondary market. Commercial paper is usually issued by companies with high credit ratings, meaning that the investment is almost always relatively low risk.
Annual award for the US firms which have “excelled in quality management and quality achievement.” Two awards may be give in each of three categories of manufacturing company, service company, and small business. Each award is based on seven criteria: (1) leadership, (2) information and analysis, (3) strategic planning, (4) human resource development and management, (5) business results, (6) customer focus, and (7) customer satisfaction. Established in 1987, the award is named after the quality-management champion Malcolm Baldridge (1922-87) who was thesecretary of commerce (1981-87) in Ronald Reagan administration. It is managed by the National Institute of Standards and Technology and conferred by the American Society For Quality
Attempts to explain all (conforming and deviant) social phenomenon in terms of how self-interested individuals makechoices under the influence of their preferences. It treats social exchange as similar to economic exchange where allparties try to maximize their advantage or gain, and to minimize their disadvantage or loss. RCT’s basic premises are that (1) human beings base their behavior on rational calculations, (2) they act with rationality when making choices, (3) their choices are aimed at optimization of their pleasure or profit. This concept has applications in economics andmarketing, and in criminology and international relations. RCT, however, cannot explain the existence of certain social phenomenon such as altruism, reciprocity, and trust, and why individuals voluntarily join associations and groupswhere collective and not individual benefits are pursued. Not to be confused with theory of rational expectations. Also called theory of reasoned action.
Federal legislation that protects workers from unfair labor practices such as unequal pay, excessive work hours, lack ofovertime compensation, and unsafe working conditions in the United States. This act is occasionally amended toprovide additional protection for workers as more unfair practices are revealed. This act includes a very importantsection that protects children from unfair conditions that were abundant during the 1800s and early 1900s. FLSA established the legal working age for children and outlined procedures that must be followed if a child under 16 isemployed.
A graphical representation of the market LIBOR rates for maturities typically under one year. LIBOR rates are not intended for long-term borrowing, so the LIBOR curve is most useful for setting short-term interest rates. Long-term rates are inferred from the rates of similar financial instruments. The LIBOR curve and the Treasury yield curve are the two most commonly usedproxies for the risk-free return of a bond. The LIBOR curve tends to be steeper and to start at a higher yield percentage than the Treasury yield curve. also called interest rate swap curve,floating-rate curve.
Accounting: (1) The annual sales volume net of all discounts and sales taxes. (2) The number of times an asset (such as cash, inventory, raw materials) is replaced or revolves during an accounting period. Human resource management: The number of employees hired to replace those who left or were fired during a 12 month period. Finance: The volumeor value of shares traded on a stock exchange during a day, month, or year.
Barings bank (risk management disaster)
The story of the Barings is one of a rogue trader that alone caused the bankruptcy of a supposed solid bank. This came at a big surprise and shock to everyone and especially to the finance industry as the phenomenal loss had been dissimulating for months fraudulently.
26th February 1995, the bank Barings Plc, one of the oldest banks of the United Kingdom was declared bankrupt. Nick Leeson, one of the bank’s trader in Singapore had lost $1.4 billions on derivatives trading while the bank reported capital was only about $600 m. This hit came principally from a hit on a long position in the Nikkei 225 futures of notional value around $7bn on the Osaka and Singapore Exchange.
Officially Nick Leeson was arbitraging the Nikkei 225 futures contracts on the different exchanges, the Singapore International Monetary Exchange (SIMEX) and the Osaka Stock Exchange (OSE), buying the same futures at a low price in one exchange and selling simultaneously at a higher price on the other exchange. For Barings London, Nick Leeson was presumably doing a trading strategy with little or no exposure to risk as he was allegedly hedged.
Leeson had been the star trader of the bank. Hired as a relatively young clerk, he went to BARINGS’ Singapore office in 1992. Within a year, he had made alone 10 million pounds, which accounts for 10% of the bank profit for that year. For this trading exploit, Nick Leeson was granted 1 £130,000 bonus on top of his £50,000 salary. Senior management had lots of trust in him and gave him progressively full firing power. Due to the rapid expansion of barings Settlements, he quickly found himself in charge of both the front and back office. He would be trading on the futures market and at the same time, be in charge of booking and reporting the various trades. In a normal day, he would work in the Singapore Money Exchange (SIMEX) until trading closed at 2pm, and then would go to the office (or ‘back room’) where all the records of the
day’s trades were recorded. This meant in particular that Nick Leeson would be the only one to check and to know if the records matched the actual sales.
Usually, a different person is doing the back office accounting, to detect any dodgy deals. However, this was not the case at Barings, giving Nick Leeson the dreadful power to cover his tracks in case of substantial loss.
In the end of 1994, this was way beyond the mind of the senior management of Barings, who cherishes their young trading rodigy. The huge Futures position of Nick Leeson was simply part of his trading mandate and no one would suspect any suspicious trading loss behind.
Leeson’s position on the Osaka Stock Exchange was publicly known as the exchange report such positions each week. Barings London thought that this long position was matched by a short position of the same notional value. This ‘s implies being short twice as many contracts as the Simex contracts are with a notional twice as small as the one of Osaka’s contracts. But, contrary to what the senior management was thinking, Nick Leeson was in fact long the
same amount in the Symex exchange. Nick Leeson managed to hide his real position in a secret account known as an Error account and with the famous number of 88888. It was possible to issimulate his position and to use the 88888 account because uncommonly for a trader, he was responsible both for front and back office. Nick bought a substantial number of contracts, 11,000
on the 20th of January 1995, just three days after the earthquake in Kobe. Probably, he thought that the market had overreacted and that the fall of the Nikkei 225 from 20,000 to 18,950 was only temporary. But the Nikkei 225 dropped even further and by Monday 23rd 1995, the Nikkei 225 was around 17,950. At the end of February 1995, Nick Leeson had leveraged his position to $7bn, holding about 61,000 contracts (55,000 March contract and 6,000 June ontracts). His position on the Simex was 8 times bigger than the next largest position. Although he could have hidden the position for quite a while because the margin called were only a small proportion of the notional value, his position was too big not to be discovered. The margin calls were enormous and Barings Tokyo London had to transfer urgently a massive $835 m to Barings Singapore in January and February to cover the margin calls on Simex. These calls made finally Barings bankrupt as its reported capital was only of $635m. Nick Leeson who was one of the golden boys of the bank, as half of the profit from Barings came from Barings Singapore went from the heaven to hell overnight. The Bank of England had to close Barings, also known as the Queen’s bank since it was used by Elizabeth II. Barings Shareholders lost
$1bn. Eventually Barings was sold to ABN-Amro for a symbolic £1.
Leeson was arrested in Frankfurt in a flew from Singapore. He was then extradited back to Singapore where he received a 6 and a half year sentence to jail. Barings creditors are still going though legal proceedings in 2002. They have tried to sue the Bank of England for its perceived negligence as the lead regulator in the whole affair without success. Many executives who were involved in the failure to control Leeson either resigned or were sacked.
In July 1999, Nick Leeson was released from jail on the ground of good behaviour. Ruined, abandoned by his wife and sick with a cancer (detected while in prison), Nick Leeson became quite popular as the symbol of the rogue trader. This was publicised by various conferences and appearance on television. He wrote the book “Rogue Trader” about his exploits, which later on have been adapted into a film staring Ewan Mc Gregor AND Anna Frield.
Nick is still currently heavily indebted and is studying psychology.
Eric Benhamou1 Swaps Strategy, London, FICC, Goldman Sachs International 1 The views and opinions expressed herein are the ones of the author’s and do not necessarily reflect those of Goldman Sachs
Rawnsley J. (1995), “Going For Broke (Nick Leeson And The Collapse Of
Barings Bank)” Harper Collins.
Leeson N. (1996), “Rogue Trader”, Little Brown.
Fay S., (1996) “The Collapse Of Barings” Richard Cohen Books.
Gapper J. and Denton N. (1996) “All That Glitters “, Hamish Hamilton.
An arrangement in which an employer shares some of its profits with its employees. The compensation can be stocks, bonds, or cash, and can be immediate or deferred untilretirement. Profit-sharing allows for changing contributions each year. Contributions are determined by a formula to allocate the overall contribution and distribution of accumulatedfunds after the retirement age. Unless the plans are defined as an elective deferral plan, the contributions are not tax deductible. Contributions and earnings can grow tax-deferred untilwithdrawal.
A method of evaluating securities by relying on the assumption that market data, such ascharts of price, volume, and open interest, can help predict future (usually short-term) markettrends. Unlike fundamental analysis, the intrinsic value of the security is not considered.Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise orfall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock.
A holistic approach to long-term success that views continuous improvement in all aspects of an organization as aprocess and not as a short-term goal. It aims to radically transform the organization through progressive changes in theattitudes, practices, structures, and systems. Total quality management transcends the product quality approach, involves everyone in the organization, and encompasses its every function: administration, communications,distribution, manufacturing, marketing, planning, training, etc. Coined by the US Naval Air Systems Command in early 1980s, this term has now taken on several meanings and includes (1) commitment and direct involvement of highest-level executives in setting quality goals and policies, allocation of resources, and monitoring of results; (2) realizationthat transforming an organization means fundamental changes in basic beliefs and practices and that thistransformation is everyone’s job; (3) building quality into products and practices right from the beginning; (4) understanding of the changing needs of the internal and external customers, and stakeholders, and satisfying them in a cost effective manner; (5) instituting leadership in place of mere supervision so that every individual performs in the best possible manner to improve quality and productivity, thereby continually reducing total cost; (6) eliminating barriers between people and departments so that they work as teams to achieve common objectives; and (7) instituting flexibleprograms for training and education, and providing meaningful measures of performance that guide the self-improvement efforts of everyone involved
Financial support system established under law to provide income, medical care, and rehabilitation to employees for illness, injury, or death arising out of, and in the course of, their employment whether or not the employee was at fault. These benefits are claimed by the employees (or their dependents) as a matter of right and the employer cannot resort to any legal defense. Amount paid as compensation is based on the salary of the employee (also on the number of his or her dependents in some jurisdictions) and is usually subject to a specified maximum. In most countries, this systemis compulsory although agricultural and domestic workers are generally excluded. Also called workmen’s compensation.
In which the value of projected benefits exceeds the value of projected obligations; thus, apension plan with a surplus. This situation usually occurs during a stock market boom aspension plans invest heavily in high quality stocks. Or it may occur when a defined benefit planis converted to a cash-balance plan. The surplus can legally be shown as the company’sincome but cannot be paid out to the stockholders because it belongs to the pension plan.
A government report which measures consumer spending on long-term purchases, productsthat are expected to last more than three years. It is intended to offer a gauge of the future of the manufacturing industry. The report is made at 8:30 am EST around the 26th of each month and is thought to provide insight into the future for the manufacturing industry. The reports are broken down by industry, which helps to eliminate the effects of single volatile industries like defense spending.
An individual who meets one of the following criteria: (1) has been laid off or terminated, or received notice of termination or lay off and is unlikely to return to previous industry of occupation, (2) has been terminated or laid off, or has received a notice of termination or lay off, as a result of permanent closure of, or substantial layoff at a plant orfacility, (3) was self-employed and now unemployed because of a natural disaster, (4) was self-employed (includingfarmer, rancher, or fisherman), but is unemployed as a result of general economic conditions in the community in which he or she resides or because of a natural disaster, or (5) is a displaced homemaker. See also displaced worker.