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My Sunday Business Washington Post column is out. This morning, we look at the question of who the real rogue is, the eejit trader, or the bank that allows massive losses to occur?

My answer is captured in the headline: There are no rogue traders, there are only rogue banks.

Here’s an excerpt from the column:

“Thus, firms that highly leverage their capital to put it into the hands of a few thousand employee speculators have a crucial job: They must ensure that capital is being precisely and properly managed. They must make sure that risk levels are tolerable, that proper controls are in place, 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 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. The assumption must be that every employee is a potential rogue trader.

Banks are supposed to have expertise in preserving capital and managing risk. If they cannot discharge those simple duties, then perhaps they should not be in the business of finance. Most of all, they should not be engaging in behavior that puts taxpayer money at risk.

Anyone who runs a shop that has a proprietary trading desk is obligated to do everything in his power to prevent that single employee from bringing down the company. It’s not too hard to see that anyone who earns a bonus by risking the firm’s capital is a potential disaster.”

I am pleased I am able to get this into a mainstream paper like the Post, especially considering who their readership is . . .

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click for ginormous version of print edition


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One minor correction: Somehow in the editing process, my slam on Ace Greenberg, the paperclip recycling CEO of Bear Stearns had his name changed to Hank Greenberg, the CEO of AIG. I’ll have that corrected in the online edition, but the print version is already out there.

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Source:
There are no rogue traders, there are only rogue banks
Barry Ritholtz
Washington Post, September 25 2011
http://www.washingtonpost.com/business/there-are-no-rogue-traders-there-are-only-rogue-banks/2011/09/20/gIQA3sCxtK_story.html

Washington Post Sunday, Todays September 25, 2011 page G6 (PDF)

Category: Bailouts, Corporate Management, Credit, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

26 Responses to “No Rogue Traders, Only Rogue Banks”

  1. crutcher says:

    Congrats for getting this important message into the MSM.

  2. petessake says:

    The message tracks with that from Napoleon. ‘There are no bad regiments, only bad colonels.’

  3. BusSchDean says:

    Nicely done. Perhaps your earlier blog on the subject also moved around the web a bit and got noticed.

  4. Greg0658 says:

    “–it rolls downhill” goes hand in hand with “the ruthless and cunning will find a way to climb the ladder out of IT”

  5. Mr. Wonderful says:

    Look out below.

    Open Interest on SPX October Put Options a whopping 900,000 contracts.

    http://www.marketwatch.com/investing/index/spx/options

  6. wunsacon says:

    NICE WORK!!!

    >> I am pleased I am able to get this into a mainstream paper like the Post, especially considering who their readership is . . .

    !!

  7. deanscamaro says:

    Barry, it was a great column that puts together what has been floated through this blog for some time. You have to wonder when/how the irresponsible, ginormous financial institutions are ever going to be reined in or destroyed. The only hope is that our governing group here in the U.S., Congress, can contribute towards stopping their drunken, risk-inbibing spree …….but that is like hoping the fox will eat itself instead of the chickens.

  8. louis says:

    Don’t they use VaR?

  9. Moss says:

    The question really is how is it enabled and how has it endured the greatest financial crisis of all time?

    Rogue banks unquestionably. The system itself is rogue. The system.. all of it.

    The term rogue is being used as if this behavior is ‘one off’.
    It is not ‘one-off’ it is always on.

  10. Another excellent pearl of wisdom Barry.

    Everybody here needs to make sure they click on the column in order to push it up the popularity ranks. That will get more eyeballs to it

  11. DrungoHazewood says:

    And some wonder why people would be opposed throwing more money at this completely rotten system. Oh they want to destroy the country-that’s the ticket. Some people are smart enough to know that unless we gut casino capitalism, the economy isn’t going anywhere. It’ll take another toke, maybe get high for a few quarters, and then we’ll be in an even worse position. But at least some people, who don’t really want to fix the underlying problems, will get reelected. The post election hangover will be a doozy. Check out Salon readers reaction to the morally and financially bankrupt blathering of Robert Reich.

  12. Bob A says:

    I just checked with Sarah Palin and she assured me Obama was responsible for this too

  13. DrungoHazewood says:

    Bob A

    Obama is right there whoring with the best of them. It puzzles me why Obama’s supporters don’t expect him to really do anything but prop up a totally corrupt system. Did you see the reader’s feedback from Reich’s Salon article? The opposition to fraud run amok is coalescing on all sides whether you like it or not.

  14. readerOfTeaLeaves says:

    It’s so much simpler to castigate rogues than it is to fundamentally restructure systems.
    BR, thx for the heavy lifting.

  15. hammerandtong2001 says:

    We only hear about the rogue traders who manage to lose spectacular sums.

    What about the rogue traders who win?

    .

  16. Ridge Runner says:

    “unless we gut casino capitalism”

    It’s much worse than that – to come close you would have to imagine a casino where the ‘highest rollers’ get to walk away with their winnings, but if they go bust, they get to tap all the small gamblers’ and all the non-gamblers’ bank accounts to make up their losses. The threat of the ‘high rollers’ if they don’t get their way on this is that they will blow up the banking system. This is crony capitalism on steroids.

  17. jnkowens says:

    To further illustrate the point, my teenage daughter is a cashier at a popular fast food establishment and if her draw is “off” by more than $5 at the end of a shift she gets written up. Three strikes and she’s out. So basically, fast food establishments have better risk controls in place than investment banks. Perhaps it’s just a matter of time before McD’s et. al are deemed TBTF? LMAO!

  18. Tarkus says:

    Lurking underneath the point of the article is “why are countries being forced to pay for all the fake debt that was created and pawned-off onto them?”

    Maybe it’s all the “Predatory Borrowers” fault. I never did figure out why the term “Loan Shark” wasn’t instead called “Borrower Shark”….

    Seriously though – whoever coined that term/idea “predatory borrower” should be made to wear a T-shirt with the word “STUPID” emblazoned on the front of it for the next 20 years….

  19. rktbrkr says:

    Simple solution end bonuses and pay salaries, bonuses are inherently risk promoting. Any corporation that pays bonuses can’t be a US insured, guaranteed bank.

    If the organization feels they have to use bonuses to maximize their profits let them do it but without any US guarantees or promises.

  20. ToNYC says:

    This is what happens when Corporations, which have the right to make contracts but no votes, have more power than individual citizens who have inalienable rights that contracts can not abridge. Ronald Reagan fought the good fight for 20 Mule Team Borax and GE, and was regarded as the patron Saint of Wall Street.
    The consequences you see at 20 Broad in the streets on September 17th was just the beginning, or the end of the beginning.

  21. Jim67545 says:

    Good article and it points up the need to separate this form of trading from the FDIC guaranteed portion (yes I know UBS is foreign.)

    Having been involved in risk management in banking I can tell you that it is a very individual issue. Each bank is left to craft their own risk avoidance system. There is very little or no input or assistance from the regulators and if you ask the regulators for help they respond that each bank’s situation is so unique that they cannot possibly offer advice – but you better get it right.

    There is also sort of a conspiracy of silence in the sense that although a bank might find a problem and fix it, they are not going to spread the specifics around to other banks. I’ve tried to pry such information from other banks to no avail. Not only is a defalcation embarassing but broadcasting it could give someone ideas. So each bank is busily inventing its own controls and, predictably, some controls are better than others. (Which goes to your point about top executive responsibility.)

    There is also the possibility that the form of rogue trading and the coverup were new under the sun, never encountered before. Like most systems, one like this is built around a mixture of anticipation of what someone might do and experience of what has been done before. I’d love to know specifically how this was done but, if past behaviour predicts the future, we and any other bankers out there will never know. And so the precisely same thing could happen elsewhere.

  22. MikeW says:

    Seems like “rogue trader” is another way of saying “blame the little guy.”

  23. DuchessGateau says:

    Bravo! You have gotten a very important message past the gates of the MSM! You deserve multiple credits: for writing it so well, for leading the charge against corruption and incompetence, and for actually getting it onto the pages of a major newspaper. Congratulations, BR!

  24. victor says:

    BR: Right on! and to add @petessake about Napoleon’s message, when he was asked “Why do generals lose battles?”he responded: “Too late, too late, too late”. So, BR you warn of the next crisis; and a priori it’ll be too late for routine corrective action; only drastic surgery will work? Can not wait!