General Issues

Bill -

The following are some issues that I have encountered that merit some
attention from a Credit Risk Mgmt. standpoint. Most of these issues are
related to the way other groups within the company do their jobs, so we need
to think about how much political capital would be expended to make some
changes happen, and whether it is worth it to fight those battles.

1. VERBAL APPROVAL FOR TRADES

I spoke to one of the day gas traders last week, and she informed me that
their group had recently had a meeting to discuss issues related to credit.
In particular, they were discussing the Credit Watch List. It was made very
clear to those traders that if they executed a transaction with a
counterparty on the Watch List without Credit approval that they would be
fired. This is, of course, good news and bad news. The good news is that we
should now be able to better monitor these transactions. The bad news is
that this puts a burden on Credit to keep the Watch List up-to-date. We
should be doing this, but it is an issue of freeing up enough time to review
the companies that we think might merit removal from the list. Easier said
than done.

The inevitable conclusion of this meeting/pronouncement from the traders'
management is that the traders will now be looking for some way to prove that
their trade was approved by Credit. This is going to lead to a need

2. COUNTERPARTY NAME ISSUES

It is not a new development that traders call down looking to do a trade and
they don't know which exact entity that they're dealing with. In most cases,
we can figure out where a trade needs to be booked and we can do the proper
analysis with respect to the trade at hand. For the counterparties with whom
we have master agreements and do regular business this is not such a big
deal; we know the parent entities and the associated subs and trading arms.
However, this issue of traders not knowing who they are dealing with is
creating a lot of problems for CPR/day gas transactions. Traders are calling
down for approval on monthly/day gas and giving the wrong counterparty name
so our credit analysis is absolutely worthless.

For example, I approved a deal for Alain Diza for a small volume of January
gas for "Fulton County (NY) Board of Education." The total receivable was
$36,000 so I approved the trade, reasoning that a county board of education
would be able to cover a $36k bill. It turns out that the actual
counterparty was "Fulton Housing Authority", an operator of low-income
housing governed by the New York State Division of Housing. This entity has
a total of $52,000 in its bank accounts. The solution is to make
traders/originators accountable for providing the correct counterparty name.
If credit losses arising from this issue were deducted from the appropriate
trader's P&L, then there would be a lot more incentive for them to get the
entity specified correctly.

3. BACK OFFICE ISSUES

It is very difficult for us to chase down the originator of a trade through
TAGG, because the back office aren't doing their jobs well. When we have
pendings issues, we have to chase down the trader through the confirms people
or the book admins. It is a process that takes too much of our time. If the
book admins would just put the trader's name on the ticket, it would save us
countless phone calls. I have mentioned to Debbie that we need to pound
Sally Beck on this issue, and she said that she would discuss it with her.
However, Beck's group still is not getting it done.