Big blow outs start in small ways. Kweku Adoboli made a $400k loss on a trade in October 2008, which he opted to hide rather than to tell his manager about. Nick Leeson started out hiding his small losses in his error account and ended up taking down Barings. Bruno Iksil (who unlike the others, hasn’t been charged for wrongdoing) made $400m for JPMorgan in 2011 and only started coming unstuck in 2012, when his losses quietly started to inflate.
In future, blowouts could be even bigger. Traders are quietly warning that they’re afraid to report mistakes for fear that the entire apparatus of authority will come crashing down on top of them when they do.
“It’s become so litigious that when something does go wrong, no one wants to say anything about it,” says one trader in London. “In the past, you might have gone to your boss and said you’ve made a mistake, but now there’s a tendency to stick things in drawers and to try sorting them out yourself. Small errors have got the potential to become massive ones. And it doesn’t help that they’ve brought in all these inexperienced young guys to risk manage the books.”
In the wake of the LIBOR manipulation scandal and in the midst of the FX manipulation investigation, management is ready to jump down the throats of anyone who appears culpable of wrongdoing or miscalculation, say insiders. “The problem is that the regulatory direction of travel has caused management to become very risk adverse themselves,” says Harvey Knight, a regulatory lawyer at Withers Worldwide. “This means that as soon as they are made aware there’s a problem there is tendency to protect their own backs by escalating it and escalating it.
“It’s the law of unintended consequences. There’s such a big song and dance once an error becomes made known, that people are less willing to draw attention to their mistakes,” Knight concludes.
One senior compliance professional says mistakes have simultaneously become more likely. Banks are trying hard to reach profit targets in order to increase the return on the capital they still allocate to trading. “Unless they find new innovative and potentially dangerous ways of making money, then they’ll never be able to increase their return on equity,” he says.
Overcoming the fear of admitting mistakes is a crucial component of cultural change. Without it, traders say compliance professionals’ lives are much harder than they need to be – more resource needs to be devoted to investigation rather than mere monitoring. Unfortunately, however, with traders everywhere in danger of losing their jobs, paranoia is likely to persist. “It’s a bloodbath in the City right now,” says Charles Ferguson, a lawyer known for representing traders who feel they’ve been wrongly fired.
“There’s a culture of fear,” Ferguson adds. “In the old days, you were afraid to say anything about your mistakes for fear that your boss wold nick your bonus. Now, you’re afraid to say anything because you fear you’ll lose your job. If something wrong has happened it tends to be underpants-on-fire all around until they can find the most junior person to blame it on and get rid of.”