Rogue Traders and Wild Hearts
Rama Krishna Vadlamudi, Hyderabad. 17 September 2011.
www.ramakrishnavadlamudi.blogspot.com We humans have a speculative-cum-creative urge in our minds and hearts. The wildstreak constantly encourages us to explore new worlds and unfamiliar territories. Greatdiscoveries have been made for centuries as a result of our innovative thinking. But whengreed overtakes our emotions, it makes us overconfident and in the end we stumble flaton our face many a time. Imagination knows no bounds in financial markets.Derivates are famously described as ‘financial weapons of mass destruction’ by WarrenBuffett, the legendary US investor (his company Berkshire Hathaway too trades heavilyin the derivatives market is a different issue). Everybody knows what role they played inbringing down the financial world to a near collapse in 2007/2008. As the saying goes,“Guns don’t kill people, people kill people.” It’s the slipshod supervision and regulationthat is responsible for the massive losses caused by derivatives traders.On 15 September 2011, UBS had reported that unauthorized trades by its trader causedlosses to the Investment Bank amounting to $ 2 billion. UBS is a Swiss-based bank. Now,we have come to know the name of the trader is Kweku Adoboli and the 31-year old hassince been arrested by London Police and charged with fraud and false accounting.Nick Leeson, who is nicknamed as
, was responsible for the collapse of the233-year old Barings Bank in 1995. As a derivatives trader for the bank in SingaporeExchange, he speculated and lost a cool $ 1.3 billion for the bank. He put his bets onNikkei, the Japanese stock market index, which crashed after the Kobe earthquake. Themoney was so huge that the bank had no choice but to close down permanently.Jerome Kerviel was working as a trader for Societe Generale’s derivatives desk in Paris.He too had tried to make huge bets on financial markets. In the process, he lost $ 7.2billion of depositors’ money in 2008.Yasuo Hamanaka was well known as ‘Mr Five Per Cent’ or ‘Mr Copper.’ He wasworking as a copper trader for Sumitomo Corporation, Japan. He was doing copper tradesfor his company on the London Metal Exchange and had bought huge positions bykeeping the physical copper ingots in US warehouses. He wanted to corner the entirecopper market of the world. But in the end he stumbled and the total losses for hiscompany were about $ 2.6 billion in 1996.
What is the Common Thread?
Amusingly, in all these cases the banks/companies claim they were kept in the dark bythese erratic traders and their trades were unauthorized. Yasuo Hamanaka had beenspeculating in the copper market for 10 years. One fails to understand how SumitomoCorporation could claim the trades were unauthorized. It’s very clear that banks’ andcompanies’ risk management and supervisory practices were very poor, to say the least.