In early August 2008, the UK Financial Services Authority (FSA) handed down a fine of some $10.5 million to Credit Suisse (CSG) for failing to (a) "conduct their business with due skill, care and diligence" and (b) "take reasonable care to organize and control their affairs responsibly and effectively, with adequate risk management systems." This fine relates to an incident in the UK operations of CSG where it is admitted that a number of traders had deliberately mispriced some Asset Backed Securities (ABS) in the wash-up of the sub-prime crisis. Surprise, surprise the traders appeared to have done this to preserve their bonuses. Have we seen this somewhere before?
Margaret Cole, the FSA's director of enforcement reportedly said that "the penalty reflects our tougher stance on enforcement and our policy of imposing higher penalties to achieve credible deterrence".
What remote planet do these people live on?
In the same month that the mispricing incident came to light, CSG reported a 'disappointing' annual profit of only $7 billion (having taken write-downs of some $2.6 billion). In other words, the FSA fine is less than .15% of total annual income, i.e. within the range of rounding errors. The Board of CSG must have been worried sick at having to pay such a 'heavy' fine, explaining their rush to settle with the FSA thereby saving themselves some $4.9 million in an 'early settlement discount'.
To put the size of 'credible deterrence' in context, CSG also reported that, in 2007, their Chairman earned total compensation of some $13 million, the CEO some $20 million and the top 13 employees a total of some $150 million. Total compensation and benefits for the group was some $14.7 billion. With numbers such as these, $10 million is merely 'a drop in the (champagne) bucket'.
This fine comes on top an earlier penalty of some $6 million by the French Banking Commission on Societe Generale for the $7.2 billion lost by Jerome Kerviel. Are FSA and the FBC competing to see who has created the best regulatory environment - from the perspectives of the banks, of course?
The FSA fine also raises the question of "home host" regulation as described in Basel II. In the CSG case, the 'host regulator' is the FSA while the 'home regulator' is the Swiss Federal Banking Commission (SFBC). Despite the screeds written about 'home host' regulation, the rules merely require the home and the host to "exchange information" on issues of interest. [Note, regulators are not actually required to do anything other than share information.] The Basel Committee expects that " much of this information exchange will take place during bilateral and multilateral cross-border implementation and ongoing supervisory arrangements such as 'supervisory colleges'." What better place to hold a 'supervisory college' than in Switzerland in the ski season?
The CSG fine having been announced and assuming that the FSA has shared the requisite information with the SFBC, we await with bated breath an announcement on the incident from Switzerland. Don't hold your breath too long! Like a Swiss goatherd, afraid to yodel across a snowy valley for fear of causing an avalanche, the SFBC have remained mute. The reply may come as an announcement of a huge fine, or increased capital impost or intense supervision (as with APRA in the case of National Australia Bank). Or it may not. In the race to the bottom in the Regulatory Olympics, the Swiss appear to be in Gold Medal position.
On the subject of Swiss, am I the only one that doesn't quite get the "Swiss Cheese" analogy? I have sat through numerous presentations and read lots of paper that throw up the "Swiss Cheese Model", but every time I want to point out that, rather than wriggle through the holes, the mouse is just going to eat the cheese! Rogue traders don't work around controls; they ignore them or just blow them away.
I do believe however that the Swiss cheese analogy is somewhat relevant to regulation. Without wishing to denigrate the (only?) contribution of Switzerland to continental cuisine, surely Basel II resembles "Swiss Cheese Fondue", in that it is formless mass of unappetizing gloop that you just cannot come to grips with, scalding your mouth when you digest it and leaving stringy bits all over your face? Only a committee of Swiss could invent such a dish.
On the other hand, Swiss Cheese Fondue would appear to be designed for regulators, since, like porridge, it is ideal for those without teeth.
