"Kinda staggering," was a typical New York reaction yesterday to the downfall of Barings. "It was ridiculous to let one guy have so much control," said anexperienced Wall Street risk manager.
he US investment banks have far more experience of derivatives trading than their British counterparts. Even so, few on Wall Street could believe how inadequate Barings' internal management controls seem to have been.
Another New York banker said: "Put enough checks and balances in place, and you can find any maverick." The checks need not be complicated. New York state banking law requires traders to take two consecutive weeks' holiday - enough time for any misdemeanours to come to light. No US bank would allow a trader to open accounts in another person's name.
Merrill Lynch uses another straightforward method of control. As well as recording every trade automatically on the computer system, it employs floorwalkers. They walk the dealing floor like school prefects, watching dealings with the power to say yes or no to trades.
Separation of responsibilities is one measure all the US banks adopt. Traders trade, salesmen sell, settlement staff settle. Their work is monitored twice, by financial controllers and risk managers.
A Wall Street derivatives trader said: "A trader here might find operations people who would hide the occasional ticket in the drawer as a favour, but for anything on a big scale, he would need the cooperation of an awful lot of people." He put the maximum position that could escape notice at less than $100m (£64m).
The management of derivatives trading in Britain is far less comprehensive. A new survey by accountancy firm Touche Ross found that more than half the City financial institutions questioned admitted their risk management systems were not up to scratch, with information too slow and incomplete.
Even more alarming, only 62 per cent of respondents thought their system broadly met the regulatory requirements.
Worse still, some firms were planning to cut their investment in risk management systems. Derek Ross, a partner at Touche Ross, said: "Most of the banks do admit that their systems could be improved."
One of their difficulties is the complexity of the software required to monitor risk across all the products and markets they trade. There is relatively little choice of off-the-shelf programmes, and many banks admit they have spent a fortune on disastrous computer projects.
Michael Coleman, director of Financial Systems Development, markets a computer package that can analyse potential losses from derivatives trades under a variety of scenarios. He said: "All banks have some software, but it is often an unsophisticated spreadsheet, and even then senior executives are probably not kept informed because it is too difficult to explain."
The fancy software is probably less important than basic management principles. Rich-ard Raeburn, a partner at accountants KPMG, said: "At Barings there seems to have been a complete failure of normal standards of control and reporting." The one crumb of comfort is the confirmation no disaster can be covered up for long.
Or, as a New York derivatives expert put it: ``Barings allowed one trader to own their Singapore office. It isn't too surprising he thought he could pull off a pretty spectacular coup. The only surprise is that it came as news to his senior managers.''Reuse content