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25 Jan 2008
Another Nick Leeson? Well what did you expect

Still reeling after the sharpest FTSE fall since 9/11, confidence in the City has not been helped this week by the antics of Soc Gen’s £75K a year rogue trader. The difference between the two catastrophes is clear. One is the consequence of numerous linked global events occurring over several quarters and culminating in a largely unavoidable problem; the other is an avoidable mess up, which it seems the simplest risk controls could have prevented, according to international search consultancy GRS. Lee Carron, Principal Consultant, GRS Operational Risk said: “Blame is natural when things go wrong and I guess it’s easier for people to target a face than a culture, but there’s no denying that a chunk of the blame has to lie with a culture that allowed someone with a back-office background to become a trader in the first place. The risk landscape has changed hugely since the Nick Leeson affair in 1995, but it’s clear to Soc Gen this morning that the risk revolution has not gone far enough for them. It’s about discipline, stricter internal controls, having more risk people and segmenting functions cleanly. The best way to protect a business from fraud is to increase the number of people that would need to be party to it, to be a ‘successful’ fraud. This guy managed to succeed for a year all on his own which is the incredible thing. Nick Leeson was not completely surprised though and neither am I. Why would I be? I see at first hand the reluctance of some banks to invest properly in their operational risk structures everyday. We’ve seen a fall of 30% in hiring ops risk people during the last 2 years.” Naturally, Soc Gen are playing down the operational risk management failure which is at the root of the scandal and are focusing on the actions of the individual. Daniel Bouton, Chairman Soc Gen, denied it was a trading or risk management fault, saying that the trader “took massive fraudulent directional positions in 2007 and 2008 beyond his limited authority.” Dan Richards, Head of GRS Risk said: “Cultures that tolerate controls of such paucity can expect to be stung – it’s a matter of time only. Banking risk management has become so much more sophisticated over the past decade but this fraud shows graphically how an infrastructure is only as strong as its weakest link. Let’s not forget that Soc Gen’s Risk team is an award winning team - their corporate and investment banking unit won the Equity Derivatives House of the Year award by The Banker magazine for the fifth year in a row last year, yet they still came unstuck. No matter how robust the risk management system in a department, success and failure are dependent on the calibre and integrity of risk professionals, and importantly on the depth of the relationships between the back-office and trading floor. There’s too much reliance on controls and not enough on relationships. Unless the leading Banks invest in the control functions and ensure that the highest quality risk, audit, legal and compliance talent are in place and allow those teams to have the teeth and profile to police the front office this will not be an isolated occurrence.”