Admit it, they don't want us

It seems unarguable that the European Commission really doesn't want Britain to be a part of it - that's the only conclusion one can draw from its threat to sue the UK if we don't weaken the eligibility criteria for benefits. In one sense it's completely understandable - the European ideal (and policy) is for laws and benefits to apply equally to all EU citizens in any given country, so if you give this policy any credence then you must press for the British benefit rules to be amended.

In another sense, it's utterly demented. The Commission (an unelected body) is part of the Eurostate which is deeply unpopular in the UK; if you want evidence then see this week's Question Time from Liverpool. It's gifting headlines to any Eurosceptic UK newspaper, which is really all of them save the Guardian and Independent. Its timing is impeccable; when government cuts are pressuring budgets UK-wide it's threatening another £2.5bn+ spend on non-UK citizens. If it was trying to provide the UK government and Eurosceptic MPs with ammunition to argue against providing any more financial aid to the EU, it could hardly have done better.

Having met a COREPER member some years ago, I would lean towards the theory that the Commission genuinely do not understand the political implications of what they are demanding - they appear wrapped in their own little Eurocentric world with only a hazy notion of the concepts and implications of national sovereignty. What I don't think they realise is that in this approach they are only accelerating the inevitable demise of the Euro, and may eventually contribute to a substantial fracturing and simplifying of the Eurozone itself.


Epic failure - the FiReControl project

I've been reading through the National Audit Office report on the FiReControl project, so my esteemed readers don't have to. By my calculations, you have each saved at least 10 points systolic on your blood pressure. If you wish to bank this saving, I recommend you read no further.

First, the basic facts: between 2004 and 2009 the Department for Communities and Local Government managed to piss away a cool £469m while attempting to consolidate 46 regional control centres into 9 super-centres. A good chunk of this money was picked up by the inept sharks at PA Consulting and the useless bags of skin at EADS. They carefully avoided involving the actual users of these centres (the Fire Service personnel) in any meaningful way while designing the systems and software. The initial estimate of £120m for the implementation was out by at least a factor of 5. The Department realised in 2009 that things were going off the rails but had confidence in the ability of EADS to correct course and deliver. This confidence was misplaced. The taxpayer ended up £469m in the hole with only 1 of the 9 centres fully built, and none of the software actually working; £250m spent so far and another £200m+ that has been committed to future spending.

It's a classic example of taking a distributed system that worked reasonably well but could stand improvement, radically altering it by centralising, pulling in outside consulting companies who didn't really know what they were doing and only really cared about billable hours, failing to involve key stakeholders in requirements and design, and spending other people's money on other people. The failure was, in these circumstances, inevitable.

Some highlights of the report:

there was no framework to assess consultants’ performance until late 2008, despite the fact that consultants and temporary contract staff made up almost half the Department’s project team during this period.
So the consultants had a billing feeding frenzy without actually needing to produce anything that worked
In July 2004, the Department estimated that FiReControl would cost £120 million to deliver, but this figure underestimated the costs of the project. The Department did not, for example, include the costs of meeting local and regional implementation work, or the costs of installing equipment in the regional control centres.
So the cost/benefit calculations looked much rosier than they were. Was this simple oversight, or deliberate omission to make the project look more attractive to ministers?
The Department appointed four Senior Responsible Owners and three Project Directors before those in post at the time of termination were appointed in 2008. EADS similarly has had three different Chief Executive Officers and four Project Directors since the IT contract was awarded.
So the most senior people never had any real tie-in to the success of the project
PA Consulting was contracted to provide consultancy services at a cost of £42 million to the end of March 2011. Its staff held key positions throughout the project, including the Project Manager, one of only two senior members of the team who remained on the project throughout its duration.
So we know where to point fingers for where much of the money went
Weaknesses within the contract agreed with EADS limited the options available to the Department.
The consulting companies are better at negotiation and contracting than Government. Shocker.
Seventeen of the twenty- seven Fire and Rescue Services that responded to our survey told us that the cancellation of the project had a significant negative operational impact on their service, and twenty-three stated that it had a significant financial impact.
So they were worse off than if this project had never happened, and note that this financial impact does not appear to be covered in the overall stated loss.
The Department agreed leases of between 20 and 25 years for each of the regional control centres and, should Fire and Rescue Services or other bodies fail to move in, the Department will continue to be responsible for rent, utilities and facilities management costs for each building over the lifetime of their lease.
Which is where the future money is going to be spent.

What really grates is that although EADS appears to have been suitably financially penalised, PA Consulting has done very nicely out of it, and no-one at the Department of Communities and Local Government appears to have had their head on a block as a result of this farce. So the most important lesson is that it's absolutely fine to piss away nearly half a billion pounds of taxpayer money through incompetence - your job is perfectly safe.


What does the tale of Kweku tell us about UBS?

The most interesting signals from UBS will come over the next 6 months or so as various people are quietly sidelined and/or 'encouraged to move on'. The former positions of those people will tell watchers quite a bit, although some care must be taken to avoid jumping to the wrong conclusions. If heads roll high in the Operations department it doesn't necessarily mean that Ops was most fundamentally at fault; it could just be that Compliance shouted loudly and pointed the finger early enough to avoid too many awkward questions about its role. It's shocking how many decisions in a bank are taken on the basis of who can shout loudest and wave their willy most vigorously. Someone on the board is going to have to go, so the question is whether it is someone representing London (the location gets the blame), or Operations/Compliance (failure to detect gets the blame).

What was the trigger for the loss? He was dealing with ETFs, so you'd think that if he was trading on an exchange then the margin calls as his position moved underwater would have sounded bells - you'd hope that even an incompetent bank would notice a huge and growing flow of money out the front door. Zero Hedge has speculated that he was very long the volatility of the Swiss Franc (CHF) which has been moving around like no-one's business over the past few months; however, once the Bank of Switzerland announced that it would hold CHF below $1.40 by printing as many francs as required to do so, volatility dropped off a cliff. The timing seems plausible for this to be related, but could be just coincidence. If it was this sudden then perhaps the margin calls were similarly sudden.

How did he get himself in this position without anyone noticing? The story of Jerôme Kerviel at SocGen is striking in its similarities - successful trader, sudden billion-sized loss, turns out to be unauthorised trading. One wonders if Kweku was the only one who thought that the firm's controls need not apply to him, or if a loose attitude towards controls and Compliance was prevalent among his peers and immediate superiors.

If I were a UBS shareholder I'd be asking pointed questions of various people and organizations. To wit:

  1. Operations: how was this position's VaR calculated? Was it calculated at all? If not, how did a contract backed by UBS avoid being flagged as missing a VaR calculation? If so, who implemented the VaR calculation and how was it faulty? What process was used to verify VaR calculations?
  2. Compliance: who was responsible for training and verifying this desk's compliance issues? What procedures were they following? Who wrote these procedures? Was it operator error or design that made them fail to identify this position?
  3. The FSA: how did UBS in London fail to implement suitable controls on this desk? Who in the firm was ultimately responsible for checking this? Who in the FSA was responsible for verifying the competence and actions of the firm representatives? Since the episode with Kerviel, what extra checks were added to detect that kind of fraud and why did they not work this time around?
  4. Kweku himself: if we promised not to sue you personally for the loss, could you point us at other places in the firm where this may be going on?

Traders and managers at the other banks must be regarding this with a mixture of amusement and concern. The former because Schadenfreude is an integral part of trading, and the latter because if this can happen in a bank where Compliance and the FSA were previously satisfied with its controls, why couldn't it happen in their own bank?

Update: UBS announces it wasn't the CHF trade but rather S&P, DAX and EuroStoxx positions, with risk offset by fictitious positions. So Kweku could cover multi-$bn positions with matching multi-$bn fictitious positions. Somehow this doesn't reassure me.


What is the Monetary Policy Committee for?

The Bank of England's Monetary Policy Committee is responsible for setting interest rates, and is required to aim at an inflation target of 2%. I think we can call their recent efforts an utter failure. This makes one wonder: are they actually trying to reach their target? If so, they seem to be extremely poor at it, as per the forecast of 6 months ago where the current 4.5% figure was right on the edge of their forecast outcomes. Unexpectedly!

If they are so poor at their forecasting, they should be replaced by a team who may be better at such forecasts. If they are not good at forecasting, one can only conclude that they simply don't want to target a 2% inflation rate and view their task as something entirely different - say, a staggering transfer of wealth from savers to borrowers which seems to have had the side effect of keeping UK house prices much higher than they would otherwise be. Who knew?

While I wouldn't necessarily agree with Land Value Tax advocates such as Mr. Wadsworth, I must confess that I'm coming around to his observations that monetary policy seems to favour home owners to a considerable degree. Discuss.


The Ming-o-meter

If you are sitting in your living room as you read this post, you may be wondering if you should clean up a bit. As a public service, here are scoring criteria to determine just how minging your room is.

Start with 4 points (original sin)

  • Deduct 1 if you have vacuumed within 3 days
  • Deduct 1 if you have tidied within 2 days
  • Deduct 1 if you have cleaned within 2 days
  • Add 5 if you don't know the difference between 'tidied' and 'cleaned'
  • Add 1 for each unwashed cup, mug or glass present. Add another 2 for each that has actual mold or insect life present.
  • Add 2 for each square metre of floor covered with unwashed clothing. If you washed it more than 1 day ago and it's on the floor then, believe me, it's not clean.
  • Add 5 if you cannot tell the original colour of the floor.
  • Add 1 for each 10 inches of your TV screen diagonal if the TV is currently turned on. Do this for each TV.
  • Add 3 if the curtains are closed and it's daytime.
  • Add 10 if Kim and Aggie would refuse to enter the room.
  • Add 2 for every unwashed plate. Add 2 if the plate has a detectable amount of food. Add 5 if that food is Mayo or tomato ketchup
  • Add 2 for every pet or small child that roams the floor. Add 5 if you have spotted poop in the past week. Add 50 if you still haven't cleaned it up.
  • If you spend more than 8 hours a day in this room, double your score.

If you're over 8 points, you really should clean up.
If you're over 20, stop browsing the Internet Right Now Dammit and go buy cleaning kit from your nearest supermarket.
If you're over 50, you still aren't as bad as the room I was in this morning. I need a shower.


FHFA and caveat emptor

It seems that the Federal Housing Finance Agency thinks that various banks sold packages of bad mortgages to Freddie Mac and Fannie Mae..

Well, duh.

What I find interesting about this is that their contention seems to be that the banks, who bought the mortgages from originators and sold them to Fannie/Freddie, knew much more about their properties than Fannie and Freddie did - given the same public information. So the banks are being blamed for Fannie/Freddie failing to do due diligence on what they were buying. Has anyone told the FHFA what Caveat Emptor means?

On $200bn of mortgages, it looks like they're seeking redress on ~20% of it - $40bn, which is a lot of money in anyone's book. Appreciating that you probably can't find this kind of money in the bank accounts of the Fannie/Freddie employees, it nevertheless seems somewhat iniquitous that the US government (for, let's face it, they're driving this) seeks to blame private industry for the failings of government employees and seeks to make a hefty chunk of cash in the process.

Perhaps the FHFA claims that the banks did better research on the mortgages than Fannie or Freddie, and should have passed on that research for free. Perhaps it claims that the banks didn't disclose what they where statutorily required to disclose, in which case the enforcer of the statutes (the FHFA, presumably) seems somewhat incompetent. Perhaps it argues that the banks should have disclosed more than what they were statutorily required to, in which case the statutes seem inadequate. Perhaps it argues that the mortgages should have been sold cheaper in hindsight, which is an interesting perspective on contract law.

Perhaps the FHFA has been a serious waste of Federal money over the past five years and is desperately seeking to camouflage this?