There were a number of interesting highlights which came out of the recent rogue trader trail in London which weren’t surprising. They can be summarized succinctly by this quote from the Economist on November 24th: “Take a smart and ambitious person, give him billions to play with, push him to make as much money as he can and do away with adult supervision.” Anyone who has ever worked on a trading floor knows that this was not a unique situation. In many banks, traders are encouraged to take risk. While the order to take risk may not be explicit, it is how traders are incentivized: Make a return and get paid a bonus. As risk and return go hand in hand, the result is obvious. What is less obvious is that proper risk management is side-lined in the drive to make returns. Risk management teams and their systems are cost centers, not revenue centers and are often treated as such. The fact that there aren’t more of these types of losses is the bigger surprise.
However, in this period of heightened bank scrutiny and regulatory revamping, the shocker is that the judgement seems to maintain the status quo and once again, the individual takes the brunt of the fall. Years in prison is a life changer for an individual while the fine for a large bank is a blip on the screen. The only message we can read from this is that the error is on the individual’s part for getting caught rather than the incentive structure and faulty risk management framework that banks use to make more profits. We shouldn’t be surprised when it happens again (and again and again).