I am yet to see one instance where financing of a preferred lifestyle has not been the root cause of either the falsification of trading results or outright theft.

In the case of the former I still have the view that the remuneration system of bonuses encourages the practice. In the latter it is still driven by the greed to finance a desired living style ( I'll include financing of addictive habits in this categorisation).

Deferral of the payment of bonuses to give time for the problems to surface is becoming more popular, but maybe tolerance of some level of losses should also be explored.

There must be some greater acceptance that we do run reasonably efficient markets and to constantly deliver supernormal profits should be taken as a clear sign something is amiss.

I'd be interested to hear anyone else's thoughts.

I have to confess I am a long term opponent of large cash bonuses, because it promotes too much the incentive to hide anything that may puts the bonus in peril.

I a sure there are many who will counter with the argument that the bonus is the driving force to greater performance, but no one has yet convinced me that there has been any risk assessment undertaken in establishing the remuneration structure.

Is anyone prepared to commit that bonuses have delivered outperformance that would not have been achieved with standard salaries, well trained staff and proper control systems?

I may be a radical but I think spending some of that bonus money into greater training and improved control systems will deliver similar profit levels with reduced risk.

But I stand willing to be corrected

I don't think there is a way to handle greed, resulting in the need to handle the possibility to commit fraud. From my point of view, internal controls can go a long way towards it.

Insider traders such as Michael Milkens and Ivan Boesky who are trading with their own money are far more likely to be driven by greed but are not necessarily "rogue".

Whether an insider trader or one with too much pride it stills falls back to what controls management are willing to sacrifice in the pursuit of the next golden egg layer.
Take away segregation of duties, ignore basic controls like confirmations, reconciliations, and simple cash management, over emphasise the power of the front office traders and disregard risk management concerns and it will be a fair bet that someone will see the gap and be prepared to take advantage.

The common feature of both was internal politics.

At Barings, we worked on a front office trading system for Japanese equity derivatives, later extended to many other financial products (and I believe still in use). It included real-time position keeping visible worldwide. Would this have helped? Maybe, but not certainly.

I left Barings for an extended far East holiday 6 months before it went down. We had delivered the system and a maintenance release. It was running in London, Tokyo and New York. Since I had some hope of a new contract with Barings on my return, I suggested dropping in on the Singapore office while I was there. I was asked not to "because the politics is a bit delicate".

An Unnamed German Bank (UGB) was a much worse case.

I was part of the team at XYZ, a joint software house created between another German bank (AGB) and UGB. We were using the Inifinty platform to implement a solution for KWG6 (based on the Capital Adequacy Directive). It was a huge project: around 100 engineers in Berlin, and 30 in Hannover.

AGB accepted our solution on schedule. This proves to me that we produced a workable solution.

But the political divisions within UGB were extreme, causing many problems (e.g. specs not being signed off for over half a year, despite regular reminders). In the end, they opted - weeks before the legal deadline - for an external solution.

One manager described as "a fig leaf which would not withstand the first cold wind of winter".

The history of the project management didn't help. I'm told Logica had it originally, but the client was unhappy with their management of it: they were kicked out, though some of their staff continued working there as consultants.

Next it came under UGB's internal management, but that too was considered a disaster. Many people on the team felt the wounded pride of the managers who lost power was a prime cause of the political games that so disrupted the UGB side of the project.

When I was working there, the project manager was a UK contractor: strong on finance, strong on IT, spoke good German, not bad as a project manager. But poor with people - especially people he didn't respect. Unfortunately, that included a number of the key UGB managers.

In conclusion, I see internal politics - and the resulting holes in the business process - as one of the main causes of operational risk.

In my view, a fair amount of rogue trading happens because the trader is presented with a payoff profile resembling a call. What do I mean by that? If the trader succeeds, they personally reap a fabulous amount of money, like a bonus. If he loses, their personal loss is nil, or is limited to a brief period of unemployment. Given this risk/reward profile, the 'rational' thing to do would be to take on inordinate risk, and hope for the best. It is a lot like being offered a call option with an inordinately small premium. Further, there is a powerful incentive to game the risk control system, and take on undetected levels of risk. Nick Leeson was the perfect example of this.

How to thwart this? Consider the incentive structure from the trader's point of view. Is it in their interest to defeat your risk controls given their personal payoff profile? If so, your controls had better be bulletproof.

Where does 'greed' come into this if they see an opportunity? The trader has two choices. They can conduct themselves ethically, or if 'greedy', they can choose the call option. It boils down to a matter of character.

if you prop trade and lose your bank loads.. if you breech your trading limits, risk control wont look at that too favourably...

deals do go wrong.. or markets can turn.. the trader might feel that he will be penalised for it and hence might try to work out fraudulent ways to "pull the wool over the eyes" of risk control while he works out ways to better his books..

otherwise he might feel like hes heading for the chop..

sometimes its greed...sometimes its fear..

was nick leeson greed.. he puts most of the blame on the fear..