Traders often use complex theories and calculations before they take their market punts. Banks should perhaps remember a very simple equation if they wish to avoid big losses - 'trusted trader + loose controls may = big problems.
Some traders, and therefore banks, will get away with it, of course. But why run the risk of another Enron, Barings, National Australia Bank or Allied Irish Banks-type trading scandal ? For your 'star' trader might not really be a star. Consider Yasuo Hamanaka and Sumitomo Corporation. That may make you think twice about traders and risk controls.
Sumitomo lost around $2.6bn after Hamanaka, 'Mr Copper', embarked on years of unauthorized trading activity. Sumitomo is suing Credit Lyonnais Rouse (CLR), who acted as its broker for some of the rogue trader's deals, as it feels that the broker knew or should have know that something dodgy was going on. The Japanese corporation is seeking $1bn in damages.
Michael Briggs QC, acting for CLR, thinks that Sumitomo is simply just trying to pass the buck. He said in High Court in London last week that 'CLR's conduct was not the cause of Sumitomo's loss. It was caused by a total and conscious failure on the part of Sumitomo to manage, supervise and monitor Mr Hamanaka's trading'. Simply put, Hamanaka was thought to be a star trader and no-one wanted to upset him.
And Nick Leeson was back in town last week, banging on about the same theme. He should have been caught before it was too late, he said, and Barings crashed. Leeson said that very simple questions and controls would have exposed him before his situation got out of hand.
The Sumitomo case continues.