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In the wake of the UBS "rogue trading" loss, Barry Ritholtz argues the problem isn't "rogue traders," but "rogue banks" that are carelessly managed while operating inside the magic circle of "too big to fail":
Firms that highly leverage their capital in order to put it into the hands of a few 1,000s employee speculators have a crucial job: They must ensure that capital is being precisely and properly managed. That must make sure that risk levels are tolerable, that proper controls are in place, that, that their IT systems and internal technology can track what is happening, in as near to real time as possible.
This is not easy. It is a complex, difficult set of processes that requires constant vigilance. It must be reflected in the corporate culture from the top down. And, it becomes more and more complex as the size of the organization grows...
Anyone who runs a shop that has a proprietary trading desk is obligated to do everything in their power to prevent a single employee from bringing down the company. A rogue trader with massive losses is a sign of complete and utter failure BY THE BANK’S MANAGEMENT. It means that the supervisory functions have failed. That the ability to track what is occurring is not happening, certainly not in real time. In the case of the UBS London trader, he hid the losing trades for 3 years (so much for real time supervisory tracking).
That represents an utter failure of management.
Hence, the arrest of a so-called rogue trader is actually a red lag that the firm is not up to the task of discharging its obligations. It is not being run properly, an admission of a poorly managed organization. Senior management should be held equally as responsible as the trader. They may not have committed fraud in hiding it, but they certainly should be sacked for what amounts to gross dereliction of duty.
Understand what this means: A firm that has Robo-signers is just as bad as a firm that has rogue traders. Both are an indictment of failure, an admission of incompetence. Each represents a crucial failure of risk management, of legal compliance, of thea bility o do their jobs safely within the law.
Why is this of interest to public policy makers? UBS’s failure to identify and prevent their rogue, just as Citigroup’s and Bank of America’s foreclosure fraud, and the gallery of errors, omissions, foibles and illegalities points to a simple reality: Firms must decide whether they are going to sacrifice profits in pursuit of safety, or sacrifice safety in pursuit of profits.
Whatever they decide, it is not the taxpayers responsibility to backstop this choice. Indeed, the collapse of firms such as Bear Stearns and Lehman Brothers was caused by the same sort of rogues as UBS’s $2 billion in losses. Only the rogues gallery there were the managers of the firms. Ace Greenberg exhorting his staff to focus on reusing paperclips, while the Mortgage division lost $100s of billions means that Ace had gone rogue; Dick Fuld surrounding himself with Yes Men while the firm’s leverage and risk exposure went through the roof also marked him as a rogue.
These are the Rogues who belong in jail — the executives, managers and boards that recklessly pursued profits REGARDLESS OF RISKS. Their failures point out who the true threats to society are.
Paul Volcker, arguably the greatest Central Banker in history, has persuasively argued that proprietary trading should not be part of the insured depository banking sector. I utterly agree with Fed Governor Thomas Hoenig, who has described the banking sector as “more akin to public utilities” than independent entities. Want to be independent to pursue proprietary trading? Let’s drop their FDIC insurance and see how far their reputations carry them.
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