Tuesday, January 29, 2008

Rogue Trader My Ass


Hey, did you see that 31-year old Societe General trader Jerome Kerviel lost his French bank $8 billion on stock futures trades gone wrong? Wall Street likes to call these incidents "rogue trading," as if it perpetrated by renegade madmen, pursing their own nefarious agendas.
Please…The real rogues are in the corner offices.
What about rogue CEO Stan O'Neal who made a market call on subprime mortgages and cost his shareholders billions of dollars in equity and losses? Kerviel didn't even personally profit from his trades, according to wire service reports. He was either a bad trader, or one who thought he knew how to make the bank some extra money. "Better to ask forgiveness than permission," goes the old saying. If he had been right, he would probably have been given a raise and several billion euros of the bank's money to play with.
By contrast, guys like Stan O'Neal and Chuck Prince at Citigroup made strategic decisions to immerse their company's balance sheets in risky financial products at the height of a credit bubble. They shifted operational focus, dedicated company resources, and committed their companies' non-risk capital to extreme risk. Oops! O'Neal and Prince lost their big bets. But they hardly walked away as losers. O'Neal cashed about US$161 million worth of severance checks after leading Merrill Lynch to its largest loss in the firm's 93-year history. Prince received a $40 million farewell package from Citigroup. Kerviel will likely receive a jail sentence. Something is very wrong here.
Let's not blame the rogue traders or the hedge funds for the mess we're in, dear investor. Let's blame the rogue capitalists – the people who've turned financial companies into vehicles for funneling shareholder capital directly into their own pockets. These titans of the banking world were supposed to be the men and women that made Britain and America the best "allocators of capital" in the world.
Little did we know that these folks would excel at allocating your capital into their pockets…and would put the entire Western financial system at risk in the process.

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