25 January 2008
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[T]op bosses cannot know everything that goes on in their organisations. The division in which SocGen suffered its fraud - equity futures hedging - is, by the standards of modern banking, a simple business. But it still had enough dark holes for a trader to hide huge losses. When you consider the countless other businesses that banks have - many of which make equity futures look like the Teletubbies - how many other ways are there for individuals to hide losses?
This is one of the threats still hanging over stock markets. It's quite possible that even now banks haven't yet announced the full extent of the losses they have made from holding US mortgage-backed assets. This isn't because rogue traders may be fraudulently hiding losses. It's because honest traders have lots of ways of pricing complicated illiquid assets and can fudge on the optimistic side. Unless a boss is more expert than his traders on multivariate copulas - the mathematical methods used to price such assets - he'll not see through their fudges.
And the boss won't be more expert. Why buy a dog and bark yourself? The division of labour that makes companies efficient - in so far as they are - is also a division of knowledge. It's just impossible for a bank boss to continually know more than every employee does. Ignorance, therefore, isn't a failing of a particular individual but an ineliminable fact about any organisation.
Which leads us to Mr Randall who points out that in order to be a banking executive these days it seems like, in addition to the more normal requirements you need to be able to suspend disbelief in a way that, when it occurs on a more retail level, we call being a gullible sucker.It is like a restaurateur opening up cans of dog-meat, sprinkling it with herbs, presenting the mix as steak tartare, and charging £25 a portion for something that will poison most of his customers. The difference is, passing off chopped donkey for Aberdeen Angus would be illegal; the repackaging of toxic sub-prime mortgages as high-quality investments was not.
They were a form of hocus-pocus economics. Even so, some of those who played the game enjoyed rewards beyond avarice. Stan O'Neal, the former chief executive of Merrill Lynch, was in charge when his bank was forced to write down $8 billion on sub-prime rubbish. He got a $160 million pay-off and early retirement. If Kerviel were found guilty, he would not be so lucky.
Now I do think that both Messrs Dillow and Randall are perhaps guilty of a teensy little soupçon of overstatement. But it has to be said that alternative ways to store one's hard earned dosh do seem to be ever more attractive. You know, socks filled with fivers, suitcases under the bed, that sort of thing.