Link, share, join, listen ...
Link, share, join, listen ...
I was amazed to hear of the 31 year old trader at UBS who has been charged by the City of London police today following the discovery of £1.3bn of unauthorised trading losses. What raised my eyebrows more was that it was the actions of the trader himself informing his bosses of the positions that brought the matter to a head, rather than being picked up by any of the risk management controls.
I accept that no systems are perfect and a few quid will go astray here or there, but £1.3bn is more that UBS earned in the first half of the year. Of course financial services is a zero sum game and no money is ever lost, it is simply transferred, I’m sure that their loss is somebody else’s gain, but that will be of poor consolation for the UBS employees whose bonuses hang on good results. This will be exactly what UBS doesn’t need at this time; the recent strength of the Swiss Franc has been killing the competitiveness of the bank and it is already under pressure back home after receiving a £35bn taxpayer bailout in the banking crisis, this episode will do nothing to reassure them that their money was well invested.
I have never seen a time when greater focus was applied by senior management within financial services companies to risk, controls and compliance yet 3 years on from the eye of storm and it would appear that some companies have learnt very little.
So what is the answer? More proactive regulation, greater external auditing of controls and risk management, more personal liabilities for Directors of banks? Do we have to accept that no system is fool proof and determined people will always find a way around it?
Comments, as ever, are welcome.
Andrew McIntee is a Director and Head of Financial Services.
Click here to read other blogs on the Financial Services sector
To ensure your blog response is published please provide your first and second name together with an email address that matches the one you used when registering on the IP site. Blog responses will only be published if we can identify who you are and/or that you are registered with Interim Partners. Please click here if you wish to register
September 19th, 2011 at 6:04 pm
Andrew,
Considering how little risk assurance was taking place a few years ago, the recent increase in focus, in any order of magnitude, is still insignificant.
In his book What is Sociology, Norbert ELIAS explains why we still have a problem. “…this time in paradigmatic form, we find a highly realistic mastery of the physio-technological environment existing side by side with an extremely fantasy-laden approach to interpersonal, social, problems. Looking around, it is not hard to find still further examples of this discrepancy. Nevertheless, many people today believe that it is possible to approach social problems from their own inborn “rationality”, quite independent of the current state of development of social knowledge and thought, yet with the same “objective” approach that a physicist or engineer brings to scientific or technological problems”
ELIAS argues that we have spent a lot to develop our phisio-technological environment but have not spent enough developing our understanding of sociology, and therefore the risks that it brings.
This brings the risks of sociological actions beyond our control. The results we have witness quite alot of recently.
I have also started reading Anglo Republic, scary, very scary!
September 19th, 2011 at 6:23 pm
Andrew
In my view this is in part due to the fact that as with many larger financial institutions, they have utterly lost sight of what ‘risk management’ is all about. Its not all about capital modelling, and its not all about distributions / curve fitting / scenario testing (repeat with the many other consultancy-originated over complications) – very often, its simply about knowing when someone has got their hand in the till.
….now someone will tell me there’s some stochastic modelling software that can predict that!
September 20th, 2011 at 9:31 am
Business is a team game and teams need leadership, communication and a bit of caring. Maybe it is different in Financial Services where some players can have egos the size of Belgium, but I would have expected someone in a position of responsibility for this chap to have taken the trouble to chat to him (and the rest of the team) from time to time about his trades (I understand he was a fairly recent transfer from backroom operations) and whether or not he was comfortable with what he was doing. When spoken to face-to-face there are usually tell-tale signs when something doesn’t sound or feel right. Yes, there is a regulatory and compliance regime, but businesses are about people and good managers have an eye on their people all the time. That’s what makes them good!
September 21st, 2011 at 4:26 pm
As detailed by the Board of Banking Supervision of the Bank of England…
“Barings’ collapse was due to the unauthorised and ultimately catastrophic activities of, it appears, one individual(Leeson) that went undetected as a consequence of a failure of management and other internal controls of the most basic kind”.
If history teaches us one thing, it’s that history teaches us nothing at all!
September 23rd, 2011 at 6:51 am
simple – the likes of ubs, goldman etc … are big in brags – they have the best quants, they have the best … but what the management lacks is
a) integrity
b) overemphaising on visibility – great money spinner, little regards for those who do the mundant but essential – the little boys like the risk managers, the ops etc .. these have no power and no talent – they are intimidating by the traders’ bombastic air, and their access to the high and mighty
c) simply – who cares? who suffers? Do those who were involved in the 2008 crisis suffer? no they move on to higher jobs – bringing with them the ability to create choas in the long term, but money in the short
They move to the likes of less mortal organisations who are awed by their prowess – ignoring the fact they are potentially a menace to these lesser organisations who have been conservative …
so no surprise – this is not UBS first time – so why so surprise? I would be surprise that the rogue trader will find himself in a multi millionaire paying job
want to bet on this?
any takes?
You can call me if you are provoke, I am prepared!
September 23rd, 2011 at 7:08 am
For those of you who saw the excellent ‘too big to fail’ lately, there is a bit towards the end where Cynthia Nixon (out of sex and the city)asks where were the regulators in the fall of Lehman Bros. Dick Fuld replies that everyone was making too much money to want to pay any attention to the regulators.
Something tells me the same happens in every bank and financial institution round the globe. When your bonus is big enough (and not forgetting that you probably risk the bonus payments of all those minions below you if you object)you will turn a blind eye to anything, even to those very actions that could ultimately save your big fat bonus and your livelihood. The pursuit of wealth can create vast fortunes as we know; but that very pursuit can destroy in equal measure. Not rocket science really and it is true courage that is needed – a rare commodity in banking it seems.
September 23rd, 2011 at 7:12 am
It is amazing but the Bank Manager to take responsibility and not to impose a fraud and the rules allow facilities in banks in Switzerland and England put an end to fraud and manipulation is not cheese they manage crises and risks in providing appropriate solutions to continue the banking business in the right direction and away from danger and bridging gap simultaneous economic crisis currently
September 23rd, 2011 at 7:55 am
I believe it is not so much about new regulation, but enforcing the regulation already in place. This actions resemble those of the Bearings case and others resulting in less spectacular losses. Risk management is obviously not working but more importantly there is a permissibility in these environments and their systems. Any model is tested with the premises you input in them. I wonder if this (other) institution is going to take any notice, tighten up control and change corporate culture… that is of course assuming all this really happened without their unwritten consent…
September 23rd, 2011 at 9:20 am
Seems like basic management.
If the Board was personally liable for trading losses above a high amount (or some less draconian financial/reputational incentive), this would not have happened – either the trading would be understood and controlled or it would not be permitted.
(And control is not rocket science. I used to audit a swiss bank in the 80’s and even the simplest transaction required at least 7 physical authorisations – usually the initialling was in different coloured inks – and there was a tangible sense of responsibility. Obviously something has been lost since those days !)
September 23rd, 2011 at 10:43 am
Greed, in a word. Earnings beyond what any individual can use… so machismo, bragging, the scoreboard. More males than females get into these wild gambles.
Supervisors and directors need to be prosecuted as well, since it is ultimately society’s money that is at risk in a bail-out. As others have pointed out, the current arrangements are hopelessly skewed to the upside, and one wonders how much resource really goes into governance. Of course the casinos have to be separated from real banking and allowed to fail. I imagine that the gamblers think the current set up is hilarious, but are perhaps now wondering whether the structure will finally be changed.
September 24th, 2011 at 2:06 am
Could it be even more basic? A loss of touch with reality?
September 26th, 2011 at 3:13 pm
Thank you all for some excellent comments. I believe that individual greed does play a part in what has gone wrong but the banks themselves are guilty of building cultures where intelligent people are recruited and positively encouraged to take risks and be highly motivated by personal gain.
Banks are running a two tier system where traders and other “producers” are considered superior to those in the back office who are there to ensure adequate risk management processes and controls in place.
There is also a lack of understanding by senior management of increasingly complicated financial instruments making the monitoring of risk exposure more difficult. What happened at Barings in 1995, Soc Gen in 2008 and now UBS in 2011 will most likely be repeated in the future unless there is significant cultural change within certain organisations, one of the ways to drive this is to overhaul the bonus systems which currently reward short term behaviours.