May 20, 2008
Etrange Amour: How I Learned to Stop Worrying and Love Traders
"[Clemenceau] said war was too important to be left to the generals. When he said that, 50 years ago, he might have been right. But today, war is too important to be left to politicians. They have neither the time, the training, nor the inclination for strategic thought." Dr. Strangelove; Kubrik, George, et.al.
Societe Generales Euro 4.9 billion loss at the hands of Jerome Kerviel is old news that will be coming back into the headlines in the days ahead. While SocGen has a new leadership team in place and Kerviel has moved on, the official autopsy will be published on the 25th.
In a recent conversation with a Soc Gen OpRisk insider (Segoi), Segoi highlighted aspects of a Strangelove-ian cultural legacy. "Traders were not supposed to be questioned.'' Not only was there, says Segoi, ''a lack of controls'', but also ''a culture that would not allow you recognize them''.
Reminds me of the following exchange:
President Merkin Muffley: General Turgidson, I find this very difficult to understand. I was under the impression that I was the only one in authority to order the use of nuclear weapons.
General ''Buck'' Turgidson: That's right, sir, you are the only person authorized to do so. And although I, uh, hate to judge before all the facts are in, it's beginning to look like, uh, General Ripper exceeded his authority.
Segois following comments are eerily similar: ''Kerviel is reported to have made money for the bank in previous years. Who likes to question whether todays profit is likely to become tomorrows extreme loss?''
Perhaps the lesson is a scenario:
Participants: board rep, president, risk committee, major business unit heads, back office.
Requirement: Identify a profitable business unit, preferably in one or group of second tier jurisdictions. Identify weak control functions, or functions where a new robust control mechanism has been recommended but where financial constraints have limited the firms ability to pursue.
Background: List your last two most recent internal crisis that have incurred heavy losses / required corporate blood and treasure to recover, consider how response to past has affected expenditure on new controls – addressing current/future problems.
Scenario: A subordinate of profitable business division X is exceeding controls, potentially driving the firm to deal with nuclear fall-out. Be creative about how it could occur in your business.
Task 1: Value the potential expense: (a) loss, fines, litigation, reactive controls improvements, old leadership payouts, new leadership retention, reorganization, reactive enhanced technology investments that raise a variety of privacy and ethical issues, and other costs.
Task 2: Determine what preventative measures would be cost effective risk mitigation.
Task 3: Identify what authorities and mandates work at cross purposes to this.
Posted by jtunkey at 08:24 PM
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