“I didn’t know that the bank was going to collapse. I didn’t know what the capital base of the bank was. I wasn’t really interested as long as the money kept coming I knew the effect of my actions would be dramatic. I didn’t really understand they would be quite as catastrophic as they were.” NICK LEESON Rogue Trader
Trading futures in Singapore, Leeson blew more than a billion dollars. Barings closed its doors and Leeson went to jail. All these years on, with super-sophisticated systems monitoring the traders and their every deal, what are the chances of it happening again? If you’d asked Nick Leeson in recent years he would have told you ‘extremely remote.’
And yet just a couple of months ago, as Europe rocked and reeled in a financial crisis that’s also shaking the rest of the world, another rogue trader was nabbed. Kweku Adoboli – a trader at the giant European bank UBS – was arrested and accused of burning 2.3 billion dollars.
How could it possibly happen?
Europe Correspondent Emma Alberici has assembled a stellar cast of famous and infamous financial luminaries to investigate if rogue traders are really reckless loners or simply individuals pushed to extremes by a reckless and unruly financial sector. What can their behavior tell us about Wall St Investment Banking and the Global Financial Crisis, the crises and collapses in Ireland, Iceland and elsewhere.
Emma Alberici meets a former insider who – speaking for the first time - alleges major criminal activity in some of Europe’s top banks and who says the regulators are asleep at the wheel.
We also hear from a trader-turned-neuro scientist whose research reveals that testosterone is a major motivator of extreme financial plays and levels of the hormone can make a millions dollars difference to annual salaries and bonuses.
ALBERICI: They’re the bad boys of high finance, burning millions, sometimes billions of dollars. But given the recklessness of banks, and their central role in the economic crisis gripping Europe and sending shockwaves around the world, are rogue traders maverick loners, or just a product of a high rolling culture out of control?
So much of what happens on Wall Street is felt across the globe. Investors take their lead from this financial hub, now people angry about banks and bankers are doing the same. The Occupy movement has spread to London, to Rome and here to downtown Dublin.
Jonathan Sugarman isn’t the kind of person you expect to meet at a rally against economic inequality. After all he was a big city banker, the very breed of 21st century capitalist who’s brought thousands of people onto the streets all over the world. But this insider is now as appalled as anyone here about a system that’s making the poor pay for the mistakes of the rich.
JONATHAN SUGARMAN: “You have hospital wards shutting down, you have schools shutting down, you have public services that are now being curtailed because there’s no money. The money’s gone to the banks. Your money, my money – everyone’s money has gone to the banks. What we need is for the regulation that exists to be enforced”.
ALBERICI: Jonathan Sugarman has never spoken publicly about his experiences until now. In 2007 he became a very senior executive at UniCredit, Italy’s biggest bank – one of the top five banks in Europe. He was the head of risk management in Ireland.
JONATHAN SUGARMAN: “At the bank we have a license to operate as a bank which is very much like a driving license. It says this is the speed you can go, this is what you can do and you have to operate within these limits and it was my job to make sure that that was done every day”.
ALBERICI: Jonathan Sugarman monitored the back office, the people responsible for checking the trades and the traders out front. He soon realised the numbers weren’t adding up. He suspected his bank was breaching strict rules over how much cash and assets it’s required to hold in reserve.
JONATHAN SUGARMAN: “And I insisted that we notify the regulator immediately which is precisely what we are required under the terms of our license and under Irish law to do”.
ALBERICI: “How certain are you that UniCredit broke the law while you were there?”
JONATHAN SUGARMAN: “A hundred per cent certain and to use the Irish expression, ‘to be sure, to be sure’ that is why I brought in this London based IT company which had a very good reputation in Dublin and the result was pretty horrific because whereas the breach that I’d reported to the regulator was a breach of twenty per cent, whereas the permissible deviation was one per cent, they rang me up one evening soon after they tied into our systems, linked into our systems and said your breach is actually forty per cent”.
ALBERICI: When he raised the alarm with his chief executive, the response was dismissive. It was a systems error. The risk manager was instructed to continue approving the deals. Jonathan Sugarman was in the thick of a reckless banking culture that was on a collision course with disaster.
JONATHAN SUGARMAN: “Well on the days that the system threw up these figures that I was told were incorrect we would sign to say ‘oh this is a system error and we’re confident that everything’s all right’, and just carry on as we did before. Never notified anyone. So when you think of the fact that when Nick Leeson brought down Barings Bank, it collapsed over eight hundred million pounds, I was signing over five billion every day that we didn’t have”.
NICK LEESON: “Understanding the dictionary definition of the word and the fact that I spent four and a half years in prison I am a criminal. I always knew what I was doing was wrong and did I think it was criminal from inception? Absolutely not”.
ALBERICI: It’s been sixteen years since Nick Leeson single-handedly brought down Britain’s oldest bank, Barings. It was such a spectacular, audacious outrageous act of financial skulduggery, Hollywood made a movie about it.
NICK LEESON: “I mean success was the thing that I always wanted and you know conversely my biggest fear was to feel a failure and the fear of failure was probably the one thing that I couldn’t countenance so putting my hand up and saying look there’s this error that I should have closed yesterday but I ran it into another day and therefore made the problem even worse, was the thing that I couldn’t do”.
ALBERICI: The bank was two hundred and thirty three years old. It had survived wars and the Great Depression, yet it took just one upstart twenty-five year old futures trader to knock it over.
NICK LEESON: “Firstly I didn’t know that the bank was going to collapse. I didn’t know what the capital base of the bank was and wasn’t really interested as long as the money kept coming and so you know I knew the effect of my actions would be dramatic, I didn’t really understand they would be quite as catastrophic as they were”.
ALBERICI: Before Leeson became a trader for Barings in Singapore, he was a back room bookkeeper in London. He knew how to work the system, keeping his losses out of sight in a secret fund. He was so good at covering his tracks, Barings thought he was making them millions and sent him more and more money to play with. It took the bank three years to wake up. By then it was way too late.
NICK LEESON: “I didn’t enjoy a moment of it .You know there was always the fear that what was happening was going to be exposed and that was always my greatest fear because that would have highlighted my incompetence and negligence and failure to everybody around me and that was the one thing that I didn’t want to happen”.
ALBERICI: “Did you ever stop in that time to think that actually some one individual or bunch of individuals were actually losing that money that you were hiding in that account? That that was someone or some institution’s money?”
NICK LEESON: “Um… no I don’t think you do”.
ALBERICI: Nick Leeson was convicted of fraud and spent four years in a Singaporean gaol. He was released in 1999 and returned to make a new life for himself in Ireland.
NICK LEESON: “When I first came back from Singapore in 1999 I used to... I was regularly asked you know do you think this can happen again and I know my answer was always no and the reason why it was no was... I know how incompetent and negligent I was. I know how incompetent and negligent the bank was. I know how bad the auditors were. I know how bad the regulators were. I know how bad the central bank was at the time and I just believed that if you tried to build the probability of all that happening together at the same time in the future, the possibilities were extremely remote”.
NEWS REPORT: [September 16, 2011] London police have arrested a potential rogue trader who could have cost the Swiss Banking Group UBS an estimated two billion dollars.
ALBERICI: The possibilities of it happening again were not so remote at all. Just months ago, thirty-one year old Kweku Adoboli became the latest trader accused of being a rogue. Based in London at the giant Swiss Bank UBS, he was in charge of the Delta 1 desk which traded complex financial products.
OLIVER METZNER: “I don’t think there are rogue traders without rogue banks. That is to say, it’s only possible if the banks want it to be possible”.
ALBERICI: Despite the technological advances since Nick Leeson’s days in Singapore, sophisticated systems monitoring traders and their activities and claims by the banks themselves that they’re vigilant, it’s alleged Kweku Adoboli did them blind. His so-called rogue trading started in 2008 at the height of the global financial crisis and around the same time the Swiss taxpayer was forking out six billion dollars to rescue UBS from the brink of bankruptcy.
OLIVER METZNER: “The crisis of 2007-2008 led to conferences and debates where we said we’d do this and that, and nothing’s been done… nothing’s been done”.
ALBERICI: Oliver Metzner is one of the world’s most sought after criminal defence lawyers. His client Jerome Kerviel is appealing a conviction for rogue trading at French Bank, Société Générale. He’s said to have gambled away six and a half billion dollars – the biggest trading loss in history. Just like the UBS scandal, Kerviel was working on the Delta 1 desk where he invented buyers and sellers and created phantom deals to hide his losses.
OLIVER METZNER: “Is it normal that bank’s bosses who lead their banks to bankruptcy don’t get punished for it? There are real problems and indeed it is difficult for the average French person to understand – why sometimes we focus on a Jerome Kerviel… a Nick Leeson and not on the banks themselves”.
ALBERICI: Here at the Palace of Justice in Paris, Jerome Kerviel admitted that he’d made big mistakes that almost brought down one of France’s biggest banks. But he wasn’t about to take all the blame for what his legal team described as a rotten culture that encouraged excessive risk taking, celebrating traders when the markets were up, only to isolate them when their bets turned bad. In this courtroom drama, calling Jerome Kerviel a rogue trader allowed the bank to cast itself as the victim.
JEROME KERVIEL: “I take my share of responsibility. I wish that the others take theirs. It’s the system, not me that set it up. Everyone took advantage, and I don’t want to take full blame. Everything was checked and seen in the Société Générale computer system”.
ALBERICI: Like Nick Leeson, before becoming a player himself, Jerome Kerviel spent years in the banks back office, recording trades and monitoring the traders.
HUGUES LE BRET: Because he did spend a lot of time in control teams so he did know very well the controls so he knew well how to avoid the controls and to hide the position and to lie to people from controls when they ask questions.
ALBERICI: Hugues Le Bret was an executive director at Société Générale when Jerome Kerviel was caught.
“Was it the culture within the bank that inspired, encouraged excessive risk taking?”
HUGUES LE BRET: “That’s what Kerviel’s saying. I don’t think the culture was to take excessive risks but I think the culture was to make more and more money in this....”.
ALBERICI: “By taking more and more risk?”
HUGUES LE BRET: “By taking more positions, inventing new products, developing new activities – the activity of Kerviel was quite new, it was invented a few years ago, a few years before, so we certainly have in trading rooms, a greed culture”.
HUGUES LE BRET: “Greed, yeah where people want to make more money, to have higher bonuses”.
JOHN COATES: “I think the biggest bonus I heard of in the banking system was about.... I think it was close to two hundred million”.
ALBERICI: “For one year’s work?”
JOHN COATES: “Yeah”.
ALBERICI: There’s very little in the way of reliable science behind what money market traders do but science might help explain how they behave.
JOHN COATES: “During the dot com bubble I noticed the behaviour of traders change, it changed very noticeably. They’re normally quite a prudent lot, you know yuppies with a family, but during the dot com bubble a lot of them, both on the trading floor and all along Wall Street became euphoric, delusional.... they had racing thoughts, diminished need for sleep. They were taking far more risk than they used to. The risk was... had terrible risk reward trade offs and they seemed hornier than usual given the amount of pornography on their computer screen back in the days when you could have porn on your computer screens. I was only later to find out that these were clinical symptoms of mania”.
ALBERICI: John Coates spent twelve years on Wall Street, running his own derivatives trading desks at Goldman Sacks and at Deutsche Bank. He gave it all up to pursue a PhD at Cambridge. His speciality? Neuro economics.
JOHN COATES: “The other thing I noticed at the time was that women were relatively immune to the behaviour I was seeing in the traders so I was seeing this irrational exuberance. I thought it was chemical. It wasn’t really happening with women so there was sort of an obvious candidate for what that chemical may be and that’s how I began doing research on testosterone”.
ALBERICI: In the first study of its kind in the world, John Coates took saliva samples in a dealing room, matching the change in a trader’s natural steroids with their profit and loss profile. His research took into account the risks they were taking and volatility in the market.
JOHN COATES: “What we found was that when the trader’s testosterone levels were high in the morning, they made a lot more money in the afternoon then they did on days when their testosterone levels were low in the morning. And it was a very powerful effect. This was huge. I mean this was, this effect if you annualised it, would have added up to about a million pounds difference in their pocket at the end of the year”.
ALBERICI: It may be just one factor among many driving traders but what we do know from recent and current crises, the culture of risk within banks and by banks is a very powerful and very destructive force and no one seemed to know when risk becomes recklessness.
JOHN COATES: “What turned out during the housing bubble was that everybody was just taking huge risk. Everybody looked like a hero and then when it blew up, everybody lost more money than they’d made in the past five years but they didn’t have to give back their bonuses. If they’d been assessed over a five year period I don’t think they would have been taking as much risk as they were”.
SIR JOHN VICKERS: “If you do have a situation where people believe there’s no way the bank can go under - maybe because the government taxpayer’s standing behind it - that encourages... it’s almost a license... for all sorts of risk taking which ought to be properly disciplined by the market place”.
ALBERICI: In Britain Sir John Vickers has been trying to figure out how to protect the wider community from the rack and ruin of mischievous banking practices. Sir John is the warden of All Souls College at Oxford University. He was the former Chief Economist at the Bank of England and recently headed up an independent government review that recommended separating prudent traditional banking from the risky business of investment banking.
SIR JOHN VICKERS: “The principles behind that in a way are to say the simple deposit taking, lending to individuals and small businesses through overdrafts and other ways, that happens in the ring fenced bank. If people want to do the sophisticated stuff, the complicated things, the international things, that’s fine, that’s up to them - but we’ve got to have a structure where there’s no way that the taxpayer can be dragged into back stopping that if the risks go bad”.
ALBERICI: But over in Ireland whistleblowers like Jonathan Sugarman don’t have a lot of faith in regulators and their rules.
“Why did you leave Uni Credit?”
JONATHAN SUGARMAN: “Because we were breaking the law and it was my name on the reports day in, day out. So under the eyes of the law, I’m the person responsible to make sure that we kept within our speed limit. And we went way beyond our speed limits on several occasions and the law is very clear, I could face five years in prison for doing that. And I just didn’t want to go to prison”.
ALBERICI: He rang the alarm that his bank was in serious breach of liquidity rules but the reaction has been painfully slow and inconclusive.
There’s been outrage in parliament.... but four years on, even after Ireland was taken to the wall by aggressive, unsustainable banking, the Irish Central Bank says it’s still "looking into" Sugarman’s claims.
“ And what did the police, the financial regulator, what did they do?”
JONATHAN SUGARMAN: “Effectively nothing, nothing at all. That is like walking into a police station with a knife with blood on it and saying “I’ve just killed someone” and you expect the police to say “well where’s the body, where’s the person, what have you done?” And they just say, “fine, just don’t do it again”. And that left me dumbfounded”.
ALBERICI: Even one of history’s most reckless operators has been astonished by the behaviour of banks. Nick Leeson questions their willingness to learn from their mistakes.
NICK LEESON: “Yeah I got myself back on the electoral roll in the UK. The first mail I got was credit card companies offering me credit cards. You know I have an injunction against me for a hundred million, I’d lost eight hundred and sixty million of an English bank’s money and people were willing to offer me credit cards, immediately on return. So it shows you straight away that the, you know the controls and systems aren’t in place that they need”.
ALBERICI: Leeson is no longer allowed to work in banking but he found a way of taking money from international banks anyway. He advises them on how to guard against the kind of behaviour he got away with at Barings. You have to wonder if they’re listening.
NICK LEESON: “The weakness is in those risk management compliance and control areas. Always has been, still is and probably always will be”.
ALBERICI: While the rogue trader has reinvented himself as banking consultant, the whistle blower is struggling.
JONATHAN SUGARMAN: “It took me a while to pick myself up and then when I started looking for other positions as a risk manager, I found a lot of shut doors and it turned out that telling the truth doesn’t really pay”.
ALBERICI: Over the past twelve months Jonathan Sugarman has been writing an anonymous blog detailing his experiences at UniCredit. This is the first time he has revealed his identity and as he continues to look for work, he can only wonder if the bank that one day takes him is playing fast and loose in a rogue system or has a rogue trader lurking in its ranks.
JONATHAN SUGARMAN: “I mean here we are in 2011 with the cost of billions to UBF because a trader who had come from the back office and was familiar with the systems knew how to get around them. Because of his insider knowledge of the system, much like Nick Leeson twenty years ago, he knew how to get around that and that is what we the taxpayers pay the regulators, the policemen of the banks to make sure cannot happen and does not happen.
And here we are twenty years later and it’s still happening”.
ALBERICI: Remarkably the rogue traders didn’t actually pocket any of the money they punted on the markets. It’s the rest of us who are still paying the bill for their bad behaviour and for the selective blindness of their bosses.