Daniel Jones

Rogue Traders and Economic Capital

"While the magnitude of the SG loss is remarkable - even incredible -- such events are increasing in frequency among large banks, in part because the financial instruments prevalent in the markets today enable and encourage this type of behavior"

I absolutely agree with that observation, Chris. The gun-slinging traders are in a heads-I-win, tails-the-bank-losses type of arrangement. They are incentivized to be as aggressive as possible. The "hedged" nature of a trade setting up one commodity vs. an equity index based upon correlations that have held up in the past is questionable at best. Nothing says both positions can't tank at the same time, or that risk premia can't act irrationally longer than the traders can remain solvent. (apologies to Keynes for butchering his quote).

While many will point to in-house risk management teams doing their jobs, there could be a strong need for a discussion on how to rein in some of the trading desks and hedge fund risk takers as well, in my opinion.