May 01, 2008
Its just human nature
I read all this garb about the SocGen deal, lack of internal control, failed control processes, collusion between the front and back office; come on be real did this guy just go delinquent? No I would say management, may be not at the top, but halfway up the ladder had to be in on the job; surely. Well on the spectrum of matters we know they are one of two things:
Assuming the bank has some definition of risk appetite these people are either incompetent or corrupt; which is a worse place to be?
If one draws a line between these two positions, management probably sat somewhere at a place where they tolerated huge positions while the ticket was paying but cut it when the tide turned. Good honest fair people I am sure.
This is one of the problems with trading losses from operational risk (trading outside policy), it is the modus operandi of it all. Traders are rewarded on performance as are most artisans in most professions however in the broker environment this encourages increased risk taking. Under the typical model, risk aversion and return are negatively correlated (through a narrow quantile of the correlation range) that is less risk aversion higher yield; so to enjoy marginal utility of reward, a trader must continue to step further from the baseline of risk aversion until there is of course negative marginal utility of return. One can liken it to ethanol consumption, the first drink is just an appetiser for the second and after the fourth, light dirty humor and a savage grope of ones appendages is a pleasant place to be, after the tenth unit the negative aspects of intoxication through saturation become evident, unfortunately well after the fact and the only cure is to ditch the margin account by unwinding anything that is open and then to vomit profusely only to commence the whole process again a week later.
There are so many human ills that fall in this bucket, taking in obesity and exercise junkies through to other obsessive compulsive disorders, perhaps the feedback model around fear itself at the other end of the scale is part of this insatiable human flaw. In this case paranoia brings those afflicted to a false and safe nirvana in the belief that risk aversion itself allows them to seek pleasure by moving as far away from pain as possible. Like our trader in reverse, if maximum risk aversion is left unchecked (too many rules, too many controls)such distortion of what is real and what is not leaves a different `non-sentient` in another baron place where returns are as low as the residual risk around them.
May be we are all suffering some kind of sickness, myopia, call it what you may. From statistical data I have reviewed from cash operations in several banks it is evident that given opportunity to defraud without risk, most people will take the chance. Its a simple calculation, an ATM cash dispenser can be in one of four positions:
1) Dispensing cash on value demanded - Operating as designed
2) Dispensing more cash than demanded - What we call an Over Pay
3) Dispensing less cash than demanded - One of those Short Pays
4) Not operating at all - Plenty of those around
The bank is looking for option one however these other places do occur. In reality, these are dumb machines and when you choose to withdraw $100 from your account, the device will simply pull a note or a mars bar wrapper from a bin and debit your account the numbers you entered on the keypad. Now say the 50 dollar notes are in the 100 bin, you`d be short 50 bucks when you withdraw and it follows that if the 100 dollar notes are in the 50 dollar bin you`d be creaming it in, being debited 50 bucks and paid 100 and that is truly money for nothing.
When these machines are loaded the operators sometimes stack the right notes in the wrong bin and that can go either way; 50% chance being under or 50% chance being over.
Now the outcome. There is a bank in Sydney, name withheld of course which receives around 3000 calls a month on complaints about ATM cash dispensary, seems like a lot but a sick machine will serve many customers incorrectly. So to work with our probability model above the average complaints over a year should be down the middle 50/50 however in reality what happens is that 2995 calls out of three thousand are for short pays and 5 or so calls are for over pays. Sadly for me I have only ever been underpaid which is one of the reasons I avoid Citi and for the 50 sing dollars I will forever be due, I feel restituted talking about them here.
So after this digression, let`s go back to our trader just to round it up. Can we seriously cut them alone for stepping outside policy and shouldn`t we implicate the management, may be the whole People-Response-Appetite system as well because being human and given the chance most people will take the over pay any day and complain, persecute and demoralize when they are out of pocket.
Posted by CausalEvents at 04:10 PM
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