Credit Suisse Traders Manipulated IT Systems To Hide $500m Losses 141
New submitter Qedward writes with a snippet from ComputerWorld UK: "Two traders at Credit Suisse have pleaded guilty to wire fraud and falsifying data after authorities said they had manipulated the bank's record systems, as the credit crunch approached, in order to help conceal over half a billion dollars' worth of losses. The traders admitted to circumventing a mandatory real time reporting system introduced by Credit Suisse, manually entering false profit and loss (P&L) figures as the products they handled collapsed in value. They did so, according to the accusations, under heavy pressure from their manager, who has also been charged."
To put it in undying words of Alan Greenspan (Score:4, Informative)
"I dont understand why corporations didnt regulate themselves ...." (Alan Greenspan, in front of senate inquiry committee on wall street scam)
Re:Australian banks (Score:5, Informative)
we too narrowly avoided that shit here in turkey too. strict controls and standards were placed after 2001 liquidity crisis.
but, american government was pressuring the american backed islamist party here, to remove those regulations, so that there could be 'competition'. the street speak is, banks like Merrill lynch, goldman sachs were just wanting to enter turkish market to peddle their scam there. the economy minister here had had already started to babble about the issue, trying to make ground for the changes they were demanded by u.s., citing various run-off-the-mill right wing catchphrases about 'competition, free market' and whatnot. and those two banks had had already set up their first hqs in istanbul.
a month later, wall street scam had came out into open. and everyone shut up. bank-wise, turkish banks stayed as they were, intact. economically everyone got affected from the worldwide crisis though.
Re:Australian banks (Score:3, Informative)
Now some might say "Just think of what they would have been able to do with even LESS regulations!"
- that's the proper question, but it's incomplete.
Think about what they would be with less GOVERNMENT regulations!
The only real regulations are capital requirements that force banks to be risk averse by default, and no amount of government regulations does that, on the contrary - the Federal reserve of USA states that one of its goals is to ensure that people take MORE RISK than they would otherwise take in the market, which is obviously regulation and it's hurting the economy and it's done with counterfeit money.
So the correct statement is: think how much stronger a position of a bank would be that had REAL regulations, that are not corrupted by political system, but instead are ensured through the market - real money, gold.
The only real regulation in the market is real money. Can't gamble with real money without the government standing there with handouts.
Can't give risky loans, can't NOT have capital. Can't break contracts - otherwise you go to jail, thus can't commit fraud.
Committing fraud is all the 'government' regulation that needs to be enforced through CONTRACT LAW and the rest of the regulations are all market driven - gold as money and no fake credit, no fake mandates from government to give out risky loans. Can't buy worthless government paper either with real money, nobody would support a bank like that in the market.
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But this requires people to understand that inflation is BAD for economy, not good, and people are obviously still not ready for it, even though they've been suffering the consequences of inflation in the world for near half a century (and countries have disintegrated because of counterfeiting of money in last century too, including USSR.)
Growth of economy depends on production, not consumption, of-course some think that 'supply side economics' is wrong, but they are the ones who don't understand that it worked marvellously for those, who actually manufacture the supply, not for those who stopped manufacturing and only consumed based on fake money.
The companies who want inflation in order to sell more of their goods - they have to be honest with their shareholders all of a sudden! It's not that they are gaining more purchasing power by selling more goods at lower valued money - the opposite is true. They are losing their purchasing power while gaining more nominal quantity of currency. So who benefits in that? Definitely not the people of the country and not even the shareholders. Do you know WHO benefits?
The top management, board of directors, simply because they can show nominal growth, which in reality is often a loss of a steady in real terms, but it looks like growth because more is sold in lower priced currency. Well, it's the same thing as selling in unchanged currency but cheaper! But it doesn't look good for their bonuses, and those are the people who go to the government to ensure that policy of inflation stays in effect.
They don't have to do much convincing there either, the government is happy to oblige - they love inflation, they are net borrowers and they want to win more elections, and giving out free money and creating inflation and using the nominal currency to give out more 'free stuff', programs, wars, laws, whatever pork, they get re-elected based on that.
The only real discipline does not come from government, it comes from real regulations - market money.
Re:Regulations... (Score:5, Informative)
The thing is, many currently-death-penalty-inducing crimes are often not done while in the clearest state of mine, often in fact, in extreme states of fear or anger/rage or desperation.
Nonetheless, the penalty should outweigh the gain of omitting a crime, by simple application of game theory.
Note: gain here is the result of total gain, minus standard expenses
Normal gain: A
Extra gain from crime: B
Cost incurred if caught with crime: C
Probability of getting caught: f
Now we can calculate the reward:
Gain for not committing the crime (CLEAN): A
Gain for committing the crime (DIRTY): (1-f)(A+B)+f(A+B-C)
which can be rewritten as: A + B - f(A+B) + f(A+B) - f C
Or simply: A + B - f C
Now, for an ideal deterrent, the cost should generally be greater than the benefit, so
CLEAN > DIRTY, or CLEAN - DIRTY > 0:
A - (A + B - f C) = f C - B > 0
Then again, the people making the laws don't really care about game theory or morals or math like this, but rather, who greases their palms with the green lubricant... So why did I even bother?
Re:Why (Score:2, Informative)
Hot tip: Where the finger should truly be pointed (Score:5, Informative)
Disclaimer: I've got a Master's in Finance from a top university, hold a highly recognised multi-year professional qualification and have spent several years in the industry. Not primarily risk management or macroeconomic oversight, but I know enough to see the issues.
A lot of what is said about banks and bankers and contributions to "the financial crisis" is plain bunk. I'm not going to point out specifics here.
The one area where a finger should be pointed, and largely hasn't, is the enormous pressure that has been exerted to lower capital requirements.
Effectively it works like this: A bank doesn't create money out of thin air (in spite of what untold millions of crazies think - only the banking system does). Every dollar it lends out, it has to borrow. The bank's balance sheet consists of assets that interest is generated on (the loans it has made, interest-paying bonds it has purchased etc.) and liabilities that interest is paid on (the bank's own short term paper, the deposits people have placed at the bank, various other funny ways to borrow money).
Effectively, for a 'simple bank', the money that the bank makes is the margin between the two.
There is however a problem: what is some of the bank's assets disappear? In other words, what if someone who has borrowed money and promised to repay it, can't? The bank still has to repay its own liabilities. Suddenly your assets are 90m and your liabilities are 100m and you are effectively insolvent. The people the bank owns money would get only 90 cent on the dollar.
Which is why banks have a capital buffer. The 'equity' of the company. The only thing the shareholders really own and generates returns for them. If you have a capital buffer of 20m, then in the example above, your capital buffer would be cut in half. Equity owners take the first loss. The bank's creditors doesn't suffer.
Now, the calculation of shareholder returns is effectively the interest margin, in absolute monies, applied to the equity. So-called Return on Equity. For example, if you lend out 100 at 5%, borrow 100 at 3%, that gives you gross income of 2. If your equity is 10, that implies a 20% return e.g. that can be paid out as a dividend.
Increasing the size of a balance sheet is extremely easy. You can just give tons of risky loans at medium interest rates, and get funded by borrowing at slightly lower interest rates. This means if you e.g. have 10m, you could start a bank that immediately borrows 100m, lends 100m, and generates you 2m per annum. Quite a decent rate of return compared to other investment options.
This means that the amount of capital required is of _extreme_ importance. If you are required to hold 10% of your total loans/debts in capital, then in the example above, starting a bank with 10m lets you lend 100m and borrow 100m and make 2m per annum as described.
If this requirement is lowered to 5%, you can do one of two things: you can suddenly crank up your lending and borrowing to 200m, still generating a gross margin of 2% (now 4m per annum), which doubles the returns on your investment from 20% to 40% per annum. Or, you can start a bank with 5m instead, lend/borrow 100m, and generate a 40% RoE still.
There has been an enormous pressure from banks and investors to reduce capital requirements. This has been pushed along and justified with models, for example, that says that bankruptcies (assets disappearing) are not correlated with each other, so if e.g. you have 100 borrowers that each borrow 1m you only need to hold 2m in assets because it's statistically very very unlikely that more than 2 of these go bankrupt each year.
What happens if the model breaks down and 3 borrowers go bankrupt at the same time, e.g. in the housing market? The bank falls over. It's not simply a matter of injecting 1m, because an enormous legal mess occurs, other suppliers of capital to the bank run away fearing bankruptcy meaning that the bank has to recall loans to repay them (which it can't), etc.
Here comes the crucial par
Re:Regulations... (Score:2, Informative)
The concept of government is about 5000 years old. Look for the old Mesopotamian civilizations like the Sumerians and the Assyrians. Even at the onset of civilization, people understood that there basic needs for government, that government doesn't work for free, and that the only question about government is what we want the resources to be used for that we provide said government. For the last 5000 years, the need for government to exist, and to include a supporting infrastructure necessary for providing even basic government services, has been unquestioned. Not because no one questioned it, but because the answers were as blindingly obvious as in the Life of Brian skit.
For some reason, Ron Paul type Libertarians think that society can exist without government. Well, it can. But no one wants to return to those times.