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The Austrian state of Salzburg is investigating whether a rogue trader may have lost £3bn of public money. FM looks at how the terrifying phenomenon of the rogue trader has already led to huge losses at some financial institutions and what can be done to stop them in the future

The financial rogue trader has become almost a legendary figure of the modern world. A lone character, driven by greed, fear or some personal demon, gambles billions and brings down the bank.

It is a familiar image – one that Hollywood has adopted wholesale. But it may be an example of a type of behaviour that is more common than we think and one that can be found in many walks of life.

Andre Spicer, professor in organisational behaviour at London’s Cass Business School, draws an intriguing comparison between the outlaw bank trader and disgraced cyclist Lance Armstrong.

“There is a huge parallel between bank trading rooms and high-performance cycling,” says Spicer.

“Both have become elite cultures of extreme performance. The people in both fields are addicted to this intensity.”

So is that the core of the rogue trading issue? If so, can it be eradicated, or at least curtailed? And what about the traders themselves and their bosses – are they untrustworthy or fools?

The litany of rogues is familiar. Nick Leeson, a derivatives trader in the Singapore offices of Britain’s Barings bank, racked up losses of £827m. In 1994, that was enough to destroy Barings.

Then there is Jérôme Kerviel, the French trader for Société Générale who, again trading derivatives, lost €4.9bn (£4bn) in the three years to 2008.

Kerviel was subsequently sentenced to five years’ imprisonment. Like Leeson, Kerviel never denied his activities, but he has always insisted that his bosses knew exactly what he was doing.

The claim that “the bosses knew” is a common feature of rogue trading cases, including that of Kweku Adoboli. He was sentenced to seven years in prison in November 2012 for rogue-trading activities at the London offices of Swiss bank UBS, which cost the bank £1.4bn.

These cases are well known because the losses were so huge and because it became a subject for the authorities.

However, traders who exceed their authority are much more common than just these three cases, but it may not always result in big losses. In some cases it may even create a profit.

Such traders may or may not be punished. They certainly do not make headlines.

Nigel Harman, partner at KPMG, helped UBS in its internal investigation into Adoboli’s activities. He cannot discuss the case, but he agrees that low-level misdemeanours have been more common in the past.

“It is certainly true that traders sometimes take positions outside their authority,” Harman says.

“And it is certainly true that if they were found out in the past they may have got just a slap on the wrist as long as they had not lost any money. But that is changing – more banks are now moving to a culture where if you do anything you are not supposed to, you just get fired. In most banks, that was not necessarily the case five years ago.”

Harman is doubtful whether rogue trading-types can be spotted among other traders.

“I would say not. If you look at Adoboli, he was a gregarious sort. But then you look at Kerviel; he was far more introverted by all accounts, a very private person. So I don’t think there is a single type.

“And I do not think money is the first and foremost motive. It has more to do with personal issues – the desire to look good among your peers.

“Even so, a lot of traders are narcissistic risk-takers, but they are not all rogue traders,” Harman says.

Andre Spicer at Cass agrees there is not much that sets the rogue apart. “It is often said that these people are simply of a criminal type; morally corrupt people who happen to find themselves in a bank. This is wrong. Their profile is actually very like that of the other people around them in the bank.”

What about the culpability of the banks? Nick Leeson is clear that the rogue trader is a criminal, but the bank that suffers from a rogue trading loss is still partly to blame.

“Any example of rogue trading highlights the failings of the organisation and suggests there are considerable flaws in the way business is transacted,” he says.

But there is a difference between sharing some blame and being knowingly culpable. Harman at KPMG is dismissive of claims by rogues that their bosses knew about or sanctioned their activities.

“The rogues tend to be very convincing people, that is how they have been operating as a rogue trader. But they all show signs of very deliberate covering up. That shows they did not really think people knew what they were doing.

“Maybe they convince themselves. Maybe these people really are sitting there thinking, ‘They let me do it, it’s their fault,’ and they manage to absolutely deceive themselves.”

But this does not let banks off the hook. The role that banks play in fostering rogues is to do with corporate culture.

Spicer returns to his analogy with cycling and a culture of extreme expectations.

“The people in trading often work incredibly long hours – 80 to 100 hours a week – and this is how you get ahead. People can maintain that for a few years, but then it starts to have a very serious effect on mental health. There was a study by the University of Southern California that showed that after about five years of working like this people suffer mental or physical breakdowns and one result of this is very poor judgement. If you look at the Kerviel case, he had not taken a holiday in three or four years.”

The apparent hard grafter, always in the office working long hours and never taking holidays, arises again and again when looking at rogue trading.

It is made worse because the rogue may feel they cannot leave the office or take a holiday, otherwise their fraud will be discovered. Adoboli and Kerviel were both notorious for working long hours.

Adoboli was arrested late at night at the UBS offices in London, long after his colleagues had gone home.

This pattern is also familiar outside the hothouse environment of investment banking.

In Austria, the federal state of Salzburg is currently dealing with its own rogue trader case that emerged just before Christmas.

It concerns Monika Rathmayer, who was hired in 2001 to make investments for the regional government.

It is alleged that in 2006 Rathmayer made huge losses on Icelandic government bonds. She is said to have set up a complex system to cover up the loss, including 253 unauthorised derivatives trades.

Total losses are reported to be €3bn. Rathmayer had taken no holiday since the loss in 2006.

Rathmayer’s case – notable because it shows that public-sector bodies can also be prone to problems – became public in November and is yet to come to trial.

Rathmayer insists that her bosses knew about the losses and her efforts to conceal them.

What sometimes gives credence to the view that bosses must have been aware of rogue activities is that the scale of losses is so huge.

Surely it could not be a secret? Spicer is clear that the explanation for this is the bosses’ stupidity.

He does not mean classic “bottom of the class” idiocy, but a refined version which he and colleague Mats Alvesson have dubbed “functional stupidity”.

“It is not that these people do not have high IQs, but what happens is they see things but then wilfully blind themselves to it. Essentially, what we noticed in our studies was some cultures in which very smart people are doing very stupid things and the reason for this is their willingness to turn a blind eye,” Spicer says.

“If you look at many reports about rogue trading you will see there were many people who saw something was wrong, but they turned away from dealing with it,” Spicer adds.

Leeson explains that this is precisely what happened in his case.

“If anyone had sat down and thought about it they would have seen the problem. But no one ever put it together.

“The head of trading would ask me why I had traded so much. I would give him an excuse. Then settlements (the part of bank that ensures payments are made) would call and ask why I needed so much money and I would give another answer. It would have no relevance to the answer I gave the head of trading. It might even have contradicted it.”

A failure to question lies at the root of almost all rogue trading cases. But it is not simply that individual trades need to be rooted out. That is like looking for the proverbial needle in a haystack.

Harman explains: “The reason rogue trading happens is that most investment banks have trillions going through their systems. What might seem like large sums to you and me – like $10bn – are not automatically noteworthy. A bank may have reconciliation teams looking at individual trades, but they have hundreds of items to look at and you cannot have someone looking over the shoulder of the traders on every deal.”

Harman believes the solution is not to look for the individual rogue trade: “What you need to do to spot rogue trading is to take a step back, look at your central records and see what patterns there are that might be typical of rogue trading.”

Harman explains that a certain pattern of trading might indicate that a trader is pretending to have hedged risks in the market by taking out a balancing trade, but the hedge is not real.

“Rogue traders tend to distinguish themselves by very large numbers of trades that are put into the system, but then reversed before they are settled,” he says.

“They will cancel it and rebook another trade, and again cancel that before it settles. The trader is maintaining a false impression of their position in the market. They are making it look like they are hedging positions, but they never let the trade settle, so the hedge is never really in place.”

Just one reversed trade is not a sign of rogue behaviour. It is not uncommon and may indicate a change in strategy, changing market conditions or an honest mistake.

But a series of reversed trades all following the same pattern may indicate that a false picture is deliberately being constructed.

Looking for these patterns – of which regular trade reversals is just one example – is the key to finding rogue trading, according to Harman.

“In the past, many banks were not doing this. Now banks are much more switched on and a number of them are buying trend-spotting software to look for these rogue patterns.”

An idea that arises in many cases is that the rogue trader has an intimate knowledge or close relationship with support staff or back offices and that this enables them to pull the wool over the eyes of the people who should be checking their work.

Harman agrees there could be an element of this in the rogue problem. But far more important, he believes, is the unbalanced hierarchical relationship between back office that carries out administration and the more glamorous front office that carries out the trading.

“It can be quite a complicated relationship between the back and front office. In most banks, the best thing for you in the back office is if the head trader thinks you are doing a good job. So back-office staff will tend to want to impress people in the front office. They may be more likely to accept explanations from traders and be subservient to them.”

Another technique to reduce the risk of rogue trading is to address human frailty. This was described by one trader as being a culture of zero tolerance, not of mistakes but of covering up.

The culture of high performance or even bullying that exists on many bank trading floors may make it hard for individuals to admit when they have made an error.

The incentive is to cover up the error. The result – epitomised by Leeson’s case – is that the trader might find he can get away with the deceit and that small errors kept secret can easily grow into a crisis below the radar.

Banks are reluctant to discuss rogue trading. Those who have had a scandal do not wish to draw attention to it. Those that have not are happy to keep their name unconnected to the phenomenon.

But the British Bankers’ Association, under its new chief executive, Anthony Browne, is attempting to grasp the nettle.

Browne points to his proposals for a banking professionals register as a useful step. He put forward these proposals to Parliament in January, which would see bankers become members of a professional body with a code of conduct and a disciplinary procedure, similar to those in the legal or accounting professions.

The idea has been dismissed as a gimmick by some, but Cass’s Spicer believes there may be some merit in this approach because it may actually help change the culture.

“I have been involved in research on this kind of idea,” he says.

“We found that when faced with a moral dilemma, those who are members of a professional body are more likely to speak out about it. If you have an independent body it puts you in a far stronger position. Many senior people in banks are members of some kind of professional body. Generally speaking, junior bankers are not.”

Inevitably, public awareness of rogue behaviour focuses on the big cases, but recent events in banking hint that it may be a wider problem.

The Libor scandal, as Leeson highlights, was a type of rogue trading. And what about the financial crash itself, caused by banks massively over-trading in debt and deceiving everyone (including themselves) about the risks they were taking.

Could it be that the same aggressive, target-driven, hyper-competitive culture lies behind this entire mess?

Spicer has a warning. “Many of the issues are not just about rogue traders, they are more general. You see banks systematically attracting certain types of personalities and having this no limits culture. The kinds of conditions that have enabled rogue traders have also driven the financial crisis.

“That crisis has created a window of opportunity to deal with this. It is slipping away.”

Nick Leeson – the man who brought down Barings bank on the culture of the trading floor

Nick Leeson sees parallels in the recent banking scandals with his own case, whereby rule-breaking quickly spirals out of control.

“Look at Libor,” Leeson says, referring to the recent scandal over bank traders at Barclays, UBS, the Royal Bank of Scotland and elsewhere rigging the London Interbank Offered Rate.

“They did not do all that at the same time. Somebody was the first to try to manipulate the rate. More people got involved until lots of people were doing it. Then people don’t think they are doing anything wrong. That breeds a culture.”

Leeson draws a direct comparison with his own case, where he used a secret trading account (number 88888) to hide his activities.

“I wasn’t the first person at Barings to set up an error account, but it was usually resolved and closed quite quickly. But I remember the very first occasion I put something in the five eights account. The next morning I went to see my boss to tell him. But he did not understand and said I should refer it to the head of trading. Then I thought a bit and there were a couple of instances where errors had resulted in people losing their jobs. From my perspective it was not worth telling anyone.

“We see the same sort of thing with Adoboli and with those involved in Libor.”

Leeson, who has never disputed his guilt, ended up in a Singapore jail for more than three years.

He was released in 1999 and now lives in Ireland, working as a consultant and a speaker.

He recalls the first time he saw Rogue Trader, the film starring Ewan McGregor that chronicled his downfall.

“Half my friends were there. Some laughed, some cried,” he recalls. Was it accurate?

“It highlights my inadequacies and those of the business I worked for.”

On those inadequacies he has strong opinions. His description of the culture at Barings bears a startling resemblance to the language used about some modern investment banks.

“To me, it is like the modern-day version of the Roman amphitheatre,” says Leeson.

“If there is a winner there has to be a loser, and it’s all about making money. It was like that at Barings – it was always about making money. I was 25 and I thought I could cope, but I found out to everyone’s cost that I could not. What you need is someone senior who is approachable and at Barings there was never anyone there like that.”

Once they have shown some success the future rogue becomes unapproachable.

“In big organisations there are always pressures not to challenge people. I was supposed to be the star trader so no one challenged me. If you have a culture where people feel uncomfortable doing that challenging, then you have a problem.”

Does Leeson believe the problem still exists?

“There are plenty of companies that do not have any problem, but the numbers of rogue traders that have appeared since me is worrying.”

So the film was quite accurate?

“There were lots of details that were not right. When they showed me going on the run you saw me drive to the airport in a beaten-up car. But I had a Mercedes,” he quips.

To book Nick Leeson for speaking engagements: Email;; 44 (0) 01372 361004.

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