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The real financial rogues

by Kevin Rafferty

Special To The Japan Times

The story of the latest “rogue trader” who allegedly cost his Swiss employer $2.3 billion in fraudulent trading is a marvelous one, especially since the alleged rogue, Kweku Adoboli, was praying on his Facebook page for a miracle more than a week before UBS realized that a large pot of its money had gone missing.

The danger is that, in highlighting the fascinating details, we miss the main plot, which has immense implications not merely for bankers and their bonuses but also for the economy and societies.

Are the real rogues the traders who conduct the deals, or the banks whose procedures are so sloppy that such huge sums slip through the cracks?

Barry Ritholtz wrote in his “Big Picture” blog, “There are no rogue traders — just as there are no predatory borrowers — there are only rogue banks.” That may be pushing things since individuals have a responsibility for their actions.

On Sept. 6, poor Adoboli — reported salary £300,000 a year — posted on Facebook, “Need a miracle”. Earlier he posted, “Can we shut down global markets for a week so everyone can just chill out?”

In the light of these pathetic comments, Adoboli seems less the alpha-male hotshot and more a daring boy who turned out to be a latter-day sorcerer’s apprentice playing with a machine whose powers he did not comprehend.

Ritholtz’s main point is valid: If you are the chief executive or manager of a business using leveraged capital to speculate, you must understand that some of your employees are not competent and must have systems in place to separate the qualified from the unqualified. You must establish trading limitations, leverage constraints and risk parameters.

You must ensure that traders stay within their money lines, maximum drawdowns and loss limits, that capital is properly employed and managed, and that IT systems and internal technology can track what is happening in as near to real time as possible.

“A rogue trader with massive losses is a sign of complete and utter failure BY THE BANK’S MANAGEMENT (his capital letters),” declares Ritholtz. That someone could run up and hide losses for three years, and not be discovered, should lead to top managers being sacked if not placed in the dock, and the institution closed down.

The last few years have seen a pattern of management failure that would in some strange aspects have been hilarious except for the fact that the failures almost brought the global financial system to its knees.

Alan “Ace” Greenberg, the so-called “legendary gazillionaire CEO” of Bears Sterns, told staff sternly that they would only get a single box of paper clips and rubber bands at the start of their career to encourage recycling and saving money — yet his mortgage syndication division lost hundreds of billions of dollars on financial derivatives. The president of AIG’s financial products operations called derivative underwriting “free money”.

What has this got to do with the economy or you or me?

These are banks, and thus protected by taxpayers’ money. Their continuing failure to control risks should reinforce the arguments of Paul Volcker, probably the greatest head of the U.S. Federal Reserve, and last week by the U.K. Independent Commission on Banking, that traditional retail banking should be ring-fenced from risky investment banking.

Martin Wolf, a member of that U.K. committee, wrote that: “I could not have asked for a better illustration of the unregulatable risks to which investment banks are exposed than (last week’s) announcement of a loss of $2 billion in unauthorized trading. No sane country can allow taxpayers to stand behind such risks.”

Thomas Hoenig, governor of the U.S. Fed, declared that banking is “more akin to public utilities” and should be protected.

It is high time for governments everywhere to take the advice: Protect the plain vanilla retail banking and the savings of ordinary depositors, and let the i-bankers gamble with their own money without bank licenses or protection of taxpayers’ funds.

There is a wider point about the sickness of modern so-called Western capitalism. Matt Taibbi in Rolling Stone touched on it in an excoriating attack on investment bankers, whom he called “professional gamblers.

“The influx of i-banking types into the once-boring worlds of commercial bank accounts, home mortgages and consumer credit has helped turn every part of the financial universe into a casino. That’s why I can’t stand the term ‘rogue trader,’ which is always tossed out there when some investment banker loses a billion dollars betting with someone else’s money.

“They’re not ‘rogue’ for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys ‘rogue traders’ when they MAKE (his italics) a billion dollars gambling.”

It is an indictment of Western capitalism that i-banking is a well-paid magnet still for the best and brightest graduates. Adoboli was paid 10 times the average U.K. wage, without bonus (if any).

To give an idea of the power of the high-frequency trading programs that i-bankers routinely employ, if supermarkets had access to them, the average household could complete its shopping for a lifetime in less than a second.

That is the present generation of HFT, with trade execution in 10 microseconds or 40,000 trades in the blink of an eye. And the new frontier is nanoseconds (billionths of a second), and the one after that is picoseconds (trillionths of a second).

But what is it all for? It does not create jobs for the masses or a single widget or put food on the table.

A belated reassertion of government protection for commercial banking, including home mortgages — which the i-bankers messed up — might establish the principle that money is a dangerously damaging god for a civilized society.

Kevin Rafferty was editor of independent daily newspapers published during annual meetings of the IMF and World Bank.