Friday, 17 October 2008

A rogue trader's view on the credit crunch

Posted by Anita Hawser

Ex-rogue traders have a habit of crawling out of the woodwork in the midst of one of the worst collapses of the global financial system. Former rogue trader, Nick Leeson whose "unsupervised speculative trading" resulted in the collapse of the UK's Barings Bank in 1995, was speaking at a conference of European corporate treasurers in Barcelona recently.

Reminiscing about the good old days as an unsupervised derivatives trader in Singapore, Leeson leveled significant blame for the global credit crisis at central banks and the regulators, who he says don't understand the markets or risks they are supposed to be regulating.

"There is plenty of risk, but no one managing it," said Leeson. "After Barings there were new regulations by the Bank of England and they spoke about responsible lending, but it clearly hasn't happened."

As the financial system now has to grapple with the concept of heightened global regulation, Leeson suggests that central banks may not be the best candidates for enforcing these regulations. "Central bank understanding is very poor," he said. In his days as a derivative trader for Barings in Singapore, Leeson said the Singapore Monetary Exchange did not have people that understood the business.

"The monetary exchange knew my position. They had a process of non-disclosure but all they had to do is look up the rates on Bloomberg and see what my [total] position was. If they had done that they would have seen that I risked the capital of the bank." In 1994 Barings was capitalised at $250 million and Leeson had $500 million in Singapore.

Although the subprime crisis, which triggered the credit crunch has been attributed to the lack of transparency and complexity of mortgage-backed collateralised debt obligations, Leeson says it is not the instruments that are the problem. "It is the people operating them. Some of the biggest banks employ the best mathematicians, but their risk calculations haven't worked."

Leeson said he got away with so much during his time at Barings because management of the bank did not deem themselves to be in a position to challenge him - in other words they did not understand the markets he was investing in so he was pretty much given free reign as long as he was bringing in profits for the bank.

While rogue traders have not been directly linked to the credit crunch, the exposure of the $7 billion in losses Jerome Kerviel racked up at Societe Generale came at a time when the crunch was starting to bite and highlighted the precarious risk-taking counterculture within investment banks - some traders were literally betting the bank and getting away with it if those bets paid off. " Jerome Kerviel was a shock to me," said Leeson. "He was given far too much autonomy for a junior trader."

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