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Waxman Andrew. Rogues of Wall Street
Introduction: A Risky Business
Acknowledgments
About the Author
CHAPTER 1. The Historical Context
CHAPTER 2. The Rogue Trader
Who Is the Rogue Trader?
The Crime of Rogue Trading
Tools of the Rogue Trader's Trade
How Rogue Traders Succeed
Can the Rogue Trader Be Stopped?
CHAPTER 3. Genius Traders: Who They Are and How to Catch Them
Characteristics of the Genius Trader
How to Manage Genius Risk
CHAPTER 4. Insider Trading
What Is Insider Trading
The Industry of Insider Trading
Trading Floors and Chinese Walls
Raising the Bar
CHAPTER 5. Price Manipulation Risk: The Big Unknown
Price Manipulation
Earnings Restatements
LIBOR
Foreign Exchange
Collusion
Emphasis on Surveillance
CHAPTER 6. The Mortgage Mess
Mortgage Securitization
Indicators of Risk
The Aftermath
CHAPTER 7. Ponzi Schemes and Snake Oil Salesmen
Ponzi Schemes
Regulators and Fraud
Bribery and Corruption
CHAPTER 8. Rogue Computer
History of Technology in Public Markets and Increasing Risk
Flash Crash 2010
Knight Capital 2012
Facebook and BATS
How Problems Occur
Key Controls
CHAPTER 9. Funding the Bad Guys – Winning the AML Battle
Modern Practices of Money Launderers and Undetected Cash Movers
Money Launderers and Terrorists
Legislature and Regulations
Impact of Regulations
An Effective AML Program
Mitigating the Risk
CHAPTER 10. Litigation and Big Data Risk
What Is the Risk?
Systemic Risks from Big Data
CHAPTER 11. Twitter Risk and Fake News Risk
CHAPTER 12. Spreadsheet Risk: Should We Ban Excel?
Mitigating the Risk
CHAPTER 13. Acts of God Risk
CHAPTER 14. Cybersecurity – The Threat from Outside and Inside the Firewall
External Cyberthreats
Insider Threats
Taking Cybersecurity Controls to the Next Level
CHAPTER 15. Turning the Tables on Risk
CHAPTER 16. Building the Right Culture: Values, Organization, and Culture
Seeing the Value of Your Contribution
Fixing the Organization
Breaking Down Organizational Barriers to Change
An Ethical Culture
CHAPTER 17. The 360‐Degree Risk Management Function
Tone from the Top: Assess Risks as Well as Goals
Connecting Risk to the Rest of the Firm
Connecting Risk Managers to Each Other
Hooking up the Operational Risk Department
CHAPTER 18. What We Talk about When We Talk about Risk
Business Goals
Business Process
Risk Dictionary
Top Risk Identification
Control Dictionary
Finally…
CHAPTER 19. The Future Is Unknowable, the Present Burdensome; Only the Past Can Be Understood
Internal Loss Incidents
External Incidents
Scenario Planning
Risk and Control Assessment
CHAPTER 20. The New Tools of the Trade
Putting People to Good Use and Avoiding Rabbit Holes
Putting Data to Good Use
Putting Psychological Insight to Use
CHAPTER 21. Cognitive Technologies
Trade Surveillance
Regulatory Compliance Management
Taking Proactive Steps
CHAPTER 22. The Role of Government and Regulators in Managing Risk
Regulating the Markets: The SEC and the CFTC
Regulating Risk Taking: The Federal Reserve and the Treasury
Regulatory Reform since the 2008 Financial Crisis
CHAPTER 23. Case Studies and Guiding Principles in Planning for Disaster
First Guiding Principle: Develop Multiple Scenarios and Optionality
Second Guiding Principle: Develop Strategies to Match the Scenarios
Third Guiding Principle: Understand How the World Is Changing
Fourth Guiding Principle: Build Political Will to Resource the Chosen Strategy
CHAPTER 24. The Risk Management Society and Its Friends
Attribute 1: A Shared Passion
Attribute 2: Shared Ethical Values
Attribute 3: Willingness to Debate Issues – The Open Society
Attribute 4: Education
Attribute 5: Interconnectedness
CHAPTER 25. Conclusion: Seven Traits for Successfully Managing Cognitive Risk
Mature Governance Structure
Top‐to‐Bottom Risk Culture
An Open Mind about Regulation
Understanding the Firm's Unique Risk Profile
Not Just Throwing Money at the Problem
Innovation and Technology
Constant Self‐Analysis
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The managing director for risk fixed him with skeptical blue eyes, “you are probably the most dangerous person at this Bank”. I was incredulous. She wasn’t talking to a swaggering trader. She was talking to her supposedly close colleague, the Head of the Global Policy Office at the Bank. The discussion for the last hour had been about the need to strengthen global compliance policies for Sales and Trading in the aftermath of the 2008 Financial Crisis. Surely, I thought, the danger must lie elsewhere.
Why do I open with this story? In many ways it’s symptomatic of what was wrong at banks before and after the 2008 Financial Crisis. There were traders losing money hand over fist, in some cases, to the point of taking their banks over the edge during The Crisis, yet the MD perceived the greater threat as stemming from the Global Policy Office. Really? The pre-Crisis view was that traders should be left more or less alone by Risk and Compliance to work their magic. This did not work out so well in retrospect. After The Crisis a new belief took hold, almost as pervasive and erroneous as the “let traders be traders” view. The new belief was that rigorous enforcement of new policies and procedures would lead almost magically to prevention of wrongdoing. The MD, perfectly cognizant of this, was afraid that risk managers would retreat behind a bureaucrat’s desk rather than engaging with day-to-day activity on the trading floor and that the effects would be just as bad as previously. Sadly, in her defense, to a significant extent it’s my view that this is what has gone wrong after the crisis.
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Rogue Traders, however, are not the only type of bad actor that investment banks have had to deal with in the past few years. The Genius Trader is the second character we meet, and, of course, is not always bad to know. As the name suggests, this character is very smart, perhaps too smart, and his colleagues and bosses give him more latitude to trade than other traders. The trades he executes and the positions he accumulates are very complex and not necessarily understood by his bosses or by the risk managers whose job it is to protect the bank from taking on too much risk. The losses that can result from these trading decisions and miscalculations can be very, very large, leading in some cases to the fall of a major financial institution.6 We will look at the many lessons for risk management from this and other episodes in Chapter 3.
Insider trading has also been front and center in the past few years. Many of those convicted of insider trading have been traders at hedge funds. One of the consequences of banking regulations has been the multiplying of hedge funds established by traders dissatisfied by the resulting conditions at the large banks. The spate of insider trading charges at hedge funds, some of which may lack sufficiently strong and independent compliance oversight and surveillance functions, has perhaps been the logical consequence of that. The issues here and potential remedies are looked at in Chapter 4.
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