Paper, Plastic, What the F...abric!

Can you save the world by bringing your own bag to Waitrose? Has your paper-bagged lunch a reduced carbon footprint? Are we barking up the wrong last trees that are left?

First things first: I come from a country where we have been charged for plastic bags in supermarkets as long as I can remember which is about 3 decades. Everybody is used to it, and guess what, nobody pays. The simple reason is that people are either bringing their own bags to the store, or alternative means of getting your purchases home.

When I moved to this country I was therefore amazed that if you buy anything, even just a pack of crisps, you are always being asked whether you would like a bag with it. It turns out however, that things seem to be changing.

Marks and Spencer recently announced a 5p charge for any plastic bag with the purpose of eliminating about 280m plastic bags (! ) a year. On a side note, this led to the following conversation when recently buying a bottle of Lucozade at Tesco after the visit to the gym.

Me: I don't need a bag for this.
Tesco Employee: Come on, have one.
Me: I really don't need a bag.
T.E.: But they are free, we're not as stingy as Marks and Spencer.

The question is whether the plastic bag is really the culprit for the demise of our planet, or simply unfairly blamed. The raw facts are:

• There are about 13bn plastic bags used in the UK every year, which is more than 200 per household.
• A plastic bag can take 400 - 1000 years to break down.
• Most plastic bags do not end up in landfills, but all over place. Therefore only 0.3% of waste in landfills is in fact made up of plastic bags.
• On the upside (if there is any), claims that thousands of seabirds are killed by plastic bags each year, seem to be bogus.
• In Ireland, where charging for plastic bags was introduced, plastic bag usage decreased, but purchases of bin liners increased by 400 per cent.

Is it maybe just the fact that the bag is plastic, that is so detrimental? Are you being more responsible if you ask to get a paper bag with your lunch at Pret a Manger?

It turns out that paper and plastic bags, if only used once, are very similar in their effects on the environment, considering everything from the resources used in production to their recycling.

I can see why some supermarkets are happily continuing to hand out plastic bags, given that they function as free advertising - you are effectively showing to the world that you shopped at Tesco whilst nobody seems to be shopping at M & S (although they will probably sell branded tote bags soon).

Even if I can't claim that I save a bunch of albatrosses every year, it seems like a no-brainer to happily refuse a plastic bag for every small purchase because it is just not needed (in particular not when you are with your man bag).

And for the regular groceries, I do it the way I grew up and bring my ecologically friendly bag labelled "Applied Probability Conference 1999".

Which is the same as being labelled "I am not a plastic bag - my owner is a geek".

Originally published on HereIsTheCity Life on 11/Mar/2008. View the original here.

Catching Movies

I don't blame recent fatherhood on this (although it certainly does not help either) but increasingly I don't find myself being able to catch the movies I would like to see in the theatre.

In general, I would distinguish movies I am interested in into 3 categories (the ones I am not interested in do not qualify)

1. The ones I definitely need to see in the theatre,
2. Movies I can happily watch on DVD or on an airplane and
3. Movies where I am remotely interested in what they are about, but I wouldn't necessarily have to watch.

The first category is the most difficult one, since it leaves little room to manoeuvre. As mentioned above, the presence of a newborn does not lend itself easily to movie nights (although at some stage the added presence of a sitter certainly will). Parent and baby screenings are only on during the week, so they should really be called "Stay-At-Home parent and baby screening" because my commitment to the cause is not that great that I would take time off to take my infant to the local multiplex.

The second is generally easier, although I did find myself recently on a number of inter-continental flights where movies were shown on a big screen for the entire cabin. Needless to say, this would never happen in Business Class, and this particular example was unfortunately a 13-hour flight to Thailand. The fact that women got handed a flower when leaving the airplane did not make me forget the poor in-flight entertainment.

For the "stay in to watch a movie" variety, LoveFilm does the trick well, although we do find ourselves regularly receiving movies wondering who on earth would have put those on our "queue".

And, to speak with our friends at MasterCard, everything else, there is MovieSpoiler. Sometime the write-ups of movies are not that great, but at least they usually cover all the latest movie releases (latest US releases that is, which means that you can get the Cliff notes for movies that haven't even come out over here).

Which is a great way to be knowledgeable at the watercooler without having to bother watching all those movies - at least the Category 3 ones.

Zeavola, Ko Phi Phi, Thailand....

Last year, I had the pleasure of spending a week in Thailand, and 2 days of those we succumbed to the "Charms of Rural Thai" in the Zeavola Resort on the island of Ko Phi Phi (one of the 2 islands were "The Beach" was shot). Here's my take on a memorable 48-hour experience.

When arriving from Phuket by speedboat (which takes about an hour and is worth the -- quite hefty -- fare) we were surprised to see that the resort is not as remote as you might believe. It is not reachable by land but is on a strip of beach with a few other resorts and a shanty town.

But don't let that put you off.

All the rooms are effectively luxury beach-shacks many with outdoor living rooms (and in some you have to go through that outdoor area to get to the bathroom). This was hard to deal with the first night when you are convinced you will be eaten alive by some crawlies.

It turns out, we weren't, although the resident pet was a rather large iguana, as well as a green snake and about a million centipedes. With this getting used to, after about 24 hours we were totally in the groove. You will soon realise that you just never were shoes (since effectively everything happens on the beach or in the adjacent jungle).

We were there for 2 nights, and it took us one to acclimatise to the setup. Wished we had stayed for 4 nights. One should bear in mind that the activity and dining options are limited, but not to the degree of being restrictive for a short stay.

More than 5 days might get a little long. Some people have mentioned the lack of privacy and security, and while the indoor/outdoor setup means that your living room can be looked into by other passing guests, we certainly didn't find the latter to be a problem.

The spa is great and so is having dinner on one of the sunbed platforms. The staff was attentive and friendly. We happened to have a room in the far back of the resort, which is not optimal. When booking one should mention to have room further to the front to avoid long walks in the dark and views of he resort next door.

Overall a fun experience for 2-4 days, although I can't think what one would do if there happens to be a period of uninterrupted rain.....

This and quite a few more reviews of Zeavola are available on TripAdvisor. And apparently, not everybody had as much of a good time as we did....

A slight change of plan

I thought it would be worth re-publishing a few short pieces of mine that have appeared over the course of the last year on the life section of HereIsTheCity, a financial news website targeted at the London crowd. 

They vary in subject and quality, and the order in which they appear does not contain any commentary on which one I favour. 

Life After Credit Derivatives

Ah, the life of a banker. Fast cars, expensive restaurants and the most presentable specimen of your preferred gender. Unfortunately, it's time to switch off Wall Street and get with 2008, where the first casualty of the year is an entire asset class: Credit Derivatives.

Me: I built trading models for credit derivatives.
Them: Credit Derivatives?
M: Yes, you know what stock options are, right? It's just that we are not taking bets on whether a share price will rise, but on whether a company goes bankrupt.
T: And that's legal?

Well, let's put it this way: not only it is legal, for a while, many people lived very happily off it. Investors received coupons that were higher than for any other investment that rating agencies thought was 'Triple-A' (that's as good as a US government bond - so really, really good), and that was even after banks had deduced their fair share of the proceedings.

Sounded like a great deal, until things started to go pear-shaped.

Last year it turned out that - surprisingly to some - lending money to people with bad credit and insufficient funds is not a good idea. Unfortunately, a lot of banks thought it was a very good idea because they could sell on the credit risk of the mortgages (i.e. the risk that a lender does not pay his mortgage) on to investors. They did so by applying some alchemy called 'Financial Engineering' to turn dodgy assets into something that rating agencies appreciated very much indeed and labelled AAA.

Banks thought they would signal to investors how positively they felt about these risks by leading by precedence. They took the risk for the riskiest pieces of these mortgages on their own books, therefore saying: don't worry if a few of these lenders default - we will generously cover the losses. They must have been figuring that somebody who earns $2,000 USD a month will always be able to service a USD $500,000 mortgage. (I leave you to do the maths).

Given the fact that in the meantime banks have written down about USD $160bn (and counting) in mortgage-related products, maybe it was not such a great idea after all.

Then banks started to become cautious about lending each other money. If another bank calls you up to borrow a few hundred million, is that because they need to fund their business, or because they need to fill another hole they found somewhere in the bottomless pit of sub-prime mortgages? They started charging each other a lot of money to borrow, if they were doing it at all.

Suddenly, credit became more expensive and the worries continued. Insurers that had guaranteed the least risky portions of the mortgage pools became concerned that they'd actually have to pay out on their insurance. And since quite a few had sold much more insurance than they could ever pay out on, this in turn concerned banks again, who thought: maybe we should safely assume that the insurance we bought is not really worth anything.

And another round of 'asset write-downs' occured and just like that, financial institutions did not look that rosy anymore.

Now, the chance of companies going bankrupt is suddenly much higher, in particular the chance of multiple companies going at the same time. That's what the financial wizards call 'Systematic Default Risk' which is just jargon for meaning 'Everything Must Go'. The consequence is that the credit risk that investors took a while ago (when it was AAA, although it might still carry this label) is now much higher.

Maybe all AAA assets are equal, but some are definitely more equal than others. Investors realised that when they called up for the monthly valuations of their investments, and what used to be worth 100 suddenly is only worth 70 - if they are lucky. If they are unlucky, they get a notice from their bank that the unfortunate strategy that was pursued with their money has actually lost all its value. How's that for an investment as safe as US government bonds?

Banks who need to hedge the bets they have entered into with the customers find themselves in the situation where nobody wants to hedge their bets anymore. So the market runs riot, and even if you want to get out of a position, you can't, since nobody wants to trade with you.

The model that is commonly used to price the likelihood of a lot of credit events happening simultaneously tells us these events are off-the-scale correlated. So correlated in fact, that it can't be expressed in numbers anymore.

To summarise, investors have not fared particularly well, banks have un-hedged bets they can't get out of, and even the wiz kids can't come up with a reasonable framework to put prices on these bets.

When I said, I build trading models, I meant: I made best efforts to build trading models.

Have I failed?

A former boss of mine always blamed market dislocations for everything.

It's worth bearing in mind that the market can stay irrational for much longer than you can stay liquid.

So on that note, I will prepare for a life after credit derivatives, and I take my own personal precautions to stay liquid.

Originally published on HereIsTheCity Life on 28/Feb/2008. View the original here.