10:22 pm - Monday December 18, 2017

Greediness faciliated by slack regulation leads to banks’ downfall

Jerome Kerviel former employee Societe Generate, the author of 4.9 billion Euros loss for the bank has claimed now that his superiors knew of his risky bets. (Source Ruadhan Mac Cormaic in Paris). He also claims his superiors turned a blind eye as long as they kept winning.

This morning I happened to read the blog post of Chris on the subject “What do criminals, bankers and Warren Buffett have in common?”

Some time back I wrote a blog on the subject ‘The lessons one has to learn from markets these days’ and identified greediness to a greater extent, failure to learn lessons throughout the journey, failure to live up to the role of a trustee and arrogance and lack of humility as some reasons for the markets’ melt down and recent resultant financial crises.

I will come back to JK of Socgen afterwards.

I was previously with a commercial bank. In the early 1980s a similar incident happened in my bank’s foreign branch in foreign exchange proprietary trading books and our bank lost a sizeable amount. In addition to my regular duties I was involved in a group to look into these transactions and come out with a detailed report.

What transpired was very simple and plain – the foreign exchange dealer who took position and incurred huge loss was betting against the markets. He was hoping that his positions would become a money spinner. His local supervisors and the country head did not prevent him from accumulating huge positions on the losing side. The country head used to send daily open positions report to our Head Office.

We at our Head Office had to use our powers to force the Country Head and the Forex Dealer to square the positions as the currencies were irretrievably moving in the opposite direction of the views taken by the dealer. The bank booked a record loss.

Immediately after this incident and before we could proceed against, the concerned forex dealer left the bank overnight, without any relief and subsequently joined a leading Global US Bank and recently retired as Risk Management Top Executive. And I was transferred to the bank’s foreign branch as a forex dealer in his place.

Well. During those days, there was no automation support. We used to maintain our positions manually and report to our controlling offices. Even in such a manual set up the bank’s management was in the knowhow of the happenings and the dealing room’s open position details on a day to day basis.

These days, I fail to understand how any bank can claim that they do not know what is happening in their dealing rooms or what their dealers are doing when they have advanced automation support. I believe by virtue of my present engagement in a Financial Technology Organization and thereby knowledge and capability of trading systems, it should be possible to generate instant management reports at predetermined intervals.

Therefore, Jerome Kerviel appears to be on a better wicket. His former employers may have a lot to explain when this is brought in courts. Well. On a different note, Jerome Kerviel has timed this revelation at an opportune time – to market his forthcoming book The Spiral: Memoirs of a Trader.

You may agree – Greediness and lax supervision could be a dangerous combination in banks.

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