IT Could Have Caught $2 Billion Rogue Trader 179
superapecommando writes "With the benefit of hindsight, IT experts are claiming that technical countermeasures at Swiss bank UBS could have stopped rogue trader Kweku Adoboli running up a $2 billion loss." If American Express and Visa can mine transaction data and put a stop order on credit cards when you unexpectedly buy gas out of state, it seems like there could be patterns to watch for when the amounts are in the billions, too.
perhaps, perhaps not (Score:5, Insightful)
A problem is that it's difficult to design a system to automatically determine "risky" or "rogue" or "non-normal" behavior in investment banking, because taking crazy bets is what they do, and interpreting their official policies loosely is a big part of that. Sometimes it turns out massively well, in which case bonuses all around; other times very badly, in which case start looking for ways to label the guy "rogue" and fire him. But it's de facto, if not officially, part of "normal" operation of an investment bank; it just sometimes turns out badly.
The computer is always guilty (Score:5, Insightful)
When a financial boo boo occurs, and IT is involved, it's IT's fault.
When a financial boo boo occurs, and IT is not involved, it's IT's fault.
Computers have a tough time defending themselves, so it is easy to pin the blame on them.
Maybe Watson, IBM's Jeopardy champ, could handle this:
"What . . . is a 'Scapegoat'?"
Re:lack of liability (Score:5, Insightful)
Because that would be fair. The whole thing is to privatize profits and let the public pay the bills. And by the way there is too much money on the market to really invest all that money and get something in return. But it is not only the financial market. You can found companies and relay responsibility for bad business decision to the banks, stakeholders etc. To make things right, the size of organizations in the financial and business area have to be limited.
100% accountability? I'm not that's what they want (Score:3, Insightful)
I think that such a rigid system would prove to be a double-edged sword and would ultimately not be adopted in some institutions. It requires precise tracking of what each trader "bets" vs their losses and the application of rules to stop them from losing too much. This is data that can find its way into the outside world in the case of scandals such as this and I'm not sure investment banks would want a perfectly documented account of losses becoming public. They play a game of high-stakes risk on a daily basis, under the respectable cover of expensive premises and thick financial service books.
A friend of mine who is in what most of us would call an extremely well-paying profession told me about a highschool friend of hers who worked as a trader in London and retired at the ripe old age of 42 to live in an amazing appartment with waterfront views in central London. I was grumbling about banker-types making phenomenal money and being nowhere near as intelligent as doctors/lawyers/engineers, to which she replied, "Of course they're not the brightest, they're certainly not dumb, but they're wired different to you or I - they're risk-takers. What they do with large sums of money on a daily basis, is gambling in a casino where 'the house always wins' isn't always the case. Normal people put in their position would not take the risks they take for fear of losing"
You can potentially win big, lose or stay the same - but some of these institutions trade retirement funds or government health funds. Governments tend to have inquiries if things go wrong and not having an exacty record of how a system broke down allows the bank face while they use the trader as the scapegoat for everything that went wrong.
Re:perhaps, perhaps not (Score:2, Insightful)
There is no "problem". Any investment bank that is not actually retarded has realtime systems that monitor overall risk of the entire bank it's, any given branch and any given desk.
Blame the bank administration (Score:5, Insightful)
The blame should be placed squarely on the shoulder's of the bank administrators. There is absolutely NO EXCUSE for not noticing a 2 BILLION DOLLAR LOSS.
It's not the computers.
It's not the traders.
It's not the system.
It's the BANKS ADMINISTRATION.
And it's high time that those lazy incompetent greedy bastards were held RESPONSIBLE for their incompetence instead of getting "bonuses."
Re:perhaps, perhaps not (Score:5, Insightful)
We shouldn't shut it down, but we should disallow them to use government guaranteed deposits for it. Deposit banks should not be allowed to use their depositor money for leveraged investments or derivatives.
a hedge worth having (Score:4, Insightful)
You need to imbibe some Argumentative Theory [edge.org], followed by a Black Swan shooter.
There's a mathematical definition of hedge, and there's the social theory of hedge. The later means "but I think I can get away with it, so it's OK". The mathematical version depends on having correct variance models. If you don't, no hedge exists. Taleb 101.
Society would benefit from hedging itself against the tendency of bankers to hedge themselves deep into the grey zone.
Seriously, bankers talking about risk is a lot like Tom Cruise interviewed after filming Days of Thunder appearing to say--very fervently--that the idea from the movie that you can't control circumstance at 200 mph is full of baloney and that he really got mad filming those scenes where other characters throw this in his face. He races his own cars and believes in control over destiny, which is common among people who take insane risks.
Even if you have LTCM wonks dictating algorithms to be coded by nuclear power engineers and run in NSA bunkers, you can't escape precipice risk. But you can shepherd all the risk with your border collie safeguard systems into the universal millisecond of doom.
So in the lingo, an unhedged risk is the one where only one bank has egg on its face, and a hedged risk is where every fucking bank has egg on its face, and greater society picks up the tab.
Re:You think? (Score:2, Insightful)
if it really was a 23 sigma move
It can only have been a "23 sigma" event if the model by which such statistics are established was utterly irrelevant.
This is the systemic problem with banking... the "risk control" is quite sophisticated - but it takes a narrow view of what constitutes risk... and, hence, no-one should be surprised when real-world risks are spectacularly under estimated. A cynic might argue that the whole subject of risk management is an elaborate illusion to give the impression that risks are being taken seriously. The reality is that where risks can't be argued to be marginalised by elaborate argument - they're outright ignored... and the complexity of the systems is relied upon to prevent scrutiny.
Writing software gives something of a unique perspective on risks... software engineers aim to "prove" the software they write - and bugs are declared whenever any sequence of events is established that would, theoretically, lead to an unacceptable outcome. It's considered "too cowboy" to argue that a bug doesn't exist because the client hasn't get generated that sequence of events in the live system. Conversely, this is exactly how risk management works for financial risks - and it is this deceit that has provided the illusion of large profits and the bonuses that accompanied them.