The Faculty Lounge

Whats News? An Online Master's In Disasters & Rats With Wings

Master's in Disasters.  That's the way they're framing it over at the Birmingham News at least.  UAB is about to start the nation's first online Master's in Advanced Safety Engineering and Management, a program designed to help engineers plan for industrial disasters.  The degree was in development before the nearby BP disaster, but sometimes marketing success requires a little kismet. 

Meanwhile, outside of Jackson, Mississippi,  they're euthanizing geese because the beasts poop too much in the parks at the Ross Barnett Reservoir.   As one reservoir official noted, "They defecate all over the ramps and piers, where people are in flip-flops or barefooted."  Some folks have questioned the rightness of this strategy, but one commenter to the Jackson Clarion-Ledger pushed back:

These geese are like rats! Kids playing soccer in goose poop and can't picnic at the rez without stepping and rolling in poop? If these were RATS at the rez no one would care. Well these are rats with wings!

Kerviel’s Fake Trades: Genius Or Copy Cat?

 In my last post, Kerviel’s Fake Trades: The Anatomy of A Cover-Up, I began discussing the fake trades Kerviel employed to disguise his unauthorized losses (and gains).  Contrary to Société Générale’s assertions that Kerviel’s sophisticated cover-up scheme, enabled by his intimate knowledge of the back-office system, prevented supervisors and bank management from detecting his unauthorized trading, I suggested that Kerviel’s cover-up techniques were not particularly original -- prior rogue traders at other financial institutions had successfully employed variations on all three of his concealment mechanisms.

For example, the first technique employed by Kerviel—the entry of fictitious transactions—resembles one used from 2001 to 2004 by a group of four currency options traders at National Australia Bank (NAB).  The group regularly breached position and risk limits, and concealed their activity through the smoothing of profits and losses, stating incorrect rates for trades, and recording fictitious transactions. In January 2004, NAB announced that the traders had lost AUD 360 million.

The NAB traders concealed these activities by entering fictitious foreign exchange spot and option transactions into the NAB system (known as “Horizon”). The profits and losses generated by Horizon were posted to the general ledger and used for the creation of management reports and NAB’s financial statements. However, during a one-hour window between the close of the trading day and the beginning of the period when the back office began checks to verify the day’s transactions, the traders had time to reverse or remove the fictitious trades from Horizon, so that they were never verified by NAB’s back office. PricewaterhouseCoopers identified 467 fictitious spot transactions and seventy-eight fictitious options transactions in 2003. Barings’ Nick Leeson (who I already discussed in a prior post) also extensively used fictitious trades to hide his unauthorized activity.

The second technique employed by Kerviel—reverse fictitious transactions—is remarkably similar to one employed by AIB’s John Rusnak (also discussed in an earlier post), who used fictitious option trades to cover his trading losses and create the appearance that his positions were hedged.  Rusnak’s practice was to simultaneously enter fictitious offsetting options trades on the same currency, with the same counterparty, premium, and strike price, but with different expiration dates. For example, Rusnak might enter the sale of a deep-in-the-money option on Japanese yen to a client in Asia, with an expiration date today.  Such an option would involve the receipt of a large premium by AIB, but would also constitute a large liability on the bank’s balance sheet. At the same time, Rusnak would claim to have purchased an offsetting option from the same counterparty, with an expiration date several weeks or a month later. At the end of the day, AIB’s books reflected only that it held a valuable asset (a deep-in-the-money option for which the bank had supposedly paid a large premium) that concealed Rusnak’s losses on unauthorized directional spot and forward trades. (I detail Rusnak’s trades and concealment strategy here, for those wanting more information).

The third technique Kerviel employed, the “provision flow,” is also quite similar to one employed by AIB’s John Rusnak. In addition to the fake options transactions detailed above, Rusnak hid his unauthorized positions by directly manipulating the inputs into AIB’s VaR calculations.  These manipulations compromised the primary apparatus by which management monitored trading operations—and by which bank regulators monitored AIB’s capital adequacy.  Although AIB’s foreign exchange trading VaR limit thus was set at a mere $2.5 million (with $1.55 million of that allocated to Rusnak), it appeared that these risk limits were rarely exceeded. In fact, Rusnak consistently exceeded these VaR limits by a wide margin.

VaR manipulations at NAB, in contrast, followed a different—and more pernicious—pattern: because the bank lacked confidence in its VaR calculations, it simply ignored them, allowing the currency options desk to regularly exceed VaR and other limits.  Ironically, minutes from the May 2002 meeting of the NAB board committee charged with oversight of risk management and financial control indicate that the committee received a report on and discussed the foreign currency losses at AIB, but concluded that, because NAB used VaR and other measures to identify risk exposures, it was protected against such harm.

In sum, although each large rogue-trading incident varies in its particulars, each also follows a general common pattern, which I’ve tried to outline in this series of posts. Claims by Société Générale, or any other financial institution, of being taken in by original and genius fraudulent schemes should thus be approached with some degree of skepticism. 

All facts, figures, and calculations used in this post, and the sources and citations from which they are derived, are detailed here.

Image Source

Related Posts:


Kerviel’s Fake Trades: The Anatomy of A Cover-Up
On Warning Signs II: Follow The Money
On Warning Signs: You Can’t Get There From Here

Rogues Versus Scapegoats

Kerviel Trial Opens to Fanfare


Société Générale: Back In The Saddle Again



Jérôme Kerviel to Société Générale: Stand By Your Man

Baseball Trivia

Name the first U.S. President:

1) to attend a major league baseball game.

2) to attend a major league baseball game outside Washington, D.C.

3) to attend a World Series game.

4) to throw out the "first pitch" at a World Series game.

5) to attend the All-Star game.

6) to attend a game on July 4th.

7) to attend an exhibition game.

8) to witness a triple play in a game.

9) to watch a game from the dugout.

10) to attend a game with his VP.

You'll find all the answers (and other famous "Presidential firsts") here.

Welcome to the Blawgosphere, theParetoCommons!

My colleague, Lawrence Baxter, has launched a new group blog, theParetoCommons, focusing on regulatory reform, public policy, and law.  According to Lawrence, the name was chosen “to combine the notion of Pareto efficiency and the complexity of regulating the commons in any industry (financial, environmental, communications, health care, etc.)”

There’s quite a bit of content up already and more will follow, especially as new contributors are added.  So, welcome Lawrence and the other new ParetoCommonsers! (Hmm, doesn’t have quite the same ring as “Lounge Lizards.”)

More on women and blogging: or, How I learned to stop worrying and love the blawg

Though I have never actually turned down an offer to guest blog, I have often accepted with some measure of trepidation. Being asked to blog feels, to me, a bit like having someone run up to you and yell in your face, "Say something interesting! Now! Hurry! I'm waiting!" It's hard to generate blog-worthy thoughts on command. Well, at least for some of us.

Moreover, there has been a fair amount of discussion about the fact that blogging - or at least blawging - seems to be primarily a male enterprise. Some of the standard explanations for this phenomenon seem to be that only men have enough a) free time, without family and other responsibilities and/or b) nerve, self-confidence, or lack of self-critical capacity (depending on your perspective) to put themselves out there, in a semi-professional setting, with often half-baked ideas, on a regular basis.

These statements may or may not be true. Regardless, I would like to end my guest stint at the Faculty Lounge by highlighting a couple of the virtues of blogging for women, even for those of us that often view such non-mandatory, non-career-advancing forums as luxuries.

Some Spaghetti-O's Contain Food; Recall Ordered

I was interested to see that 15 million pounds of Spaghetti-O's were recalled today by Campbell Soup.  The allegation is that the "meatballs" were undercooked and a health risk.  Lost in this story is the implication that Spaghetti-O's contain food.  I had always thought that a meal of Spaghetti-O's, Twinkies, and perhaps a little Fruit Roll-Up, provided the perfect way for a fully sanitary, foodless meal.  You know: the kind of thing you could eat in Outer Space. 

Know what?  I'm getting hungry for a delicious breakfast of Space Food Sticks and Tang.

Kerviel’s Fake Trades: The Anatomy of A Cover-Up

I’m taking a bit of a detour in my planned series of posts on the Jerome Kerviel trial (see the links to related posts, below) in order to talk about this week’s testimony, which has focused on Kerviel’s cover up scheme – the “fake trades.” 

According to the FT:

The courtroom at the Palais de Justice was hearing evidence on the fifth day of the trial of the 33-year-old, who faces up to five years in prison if found guilty of breach of trust, computer abuse and forgery. The session focused on Mr Kerviel's fake trades.

In testimony interrupted by deafening claps of thunder and torrential rain, Mr Kerviel, told Dominique Pauthe, the judge, that he entered fake hedging trades not to bypass controls but to carry his real positions forward, "to be able to realise a gain for the bank". . . .

A former SocGen compliance officer also told the court yesterday that several databases would have been available to Mr Kerviel's superiors where all trading operations could be tracked.

Valérie Rolland said his superiors would also have been able to track down changes made in the data entry system to mask positions.

From the start, Société Générale has emphasized Kerviel’s “sophisticated” cover-up scheme, enabled by his intimate knowledge of the back-office system, which prevented supervisors and bank management from detecting his unauthorized trading.  Kerviel may, indeed, possess valuable security knowledge and skills: shortly after his Soc Gen debacle, Kerviel was hired by Lemaire Consultants & Associés, an information-technology consultancy specializing in IT network installation and security. 

But in reality, the bulk of Kerviel’s cover up consisted of the standard fare employed by most rogue traders: fake trades or other system entries designed to hide unauthorized trading activity, backed up by lies (which were never questioned by his supervisors or managers) and forged documents.  As I’ll demonstrate in my next post on this topic, Kerviel’s cover-up techniques were not particularly original -- prior rogue traders at other financial institutions had successfully employed all three of his concealment mechanisms.

Moreover, Kerviel was not the only Société Générale trader engaged in trading violations and unauthorized practices.  As stated by PricewaterhourseCoopers in its subsequent review of the event, Société Générale ignored common warning signs of potential problems, breeding a culture of noncompliance:

Front office activities developed against the backdrop of a strong entrepreneurial culture based on trust. The surge in Delta One trading volumes and profits was accompanied by the emergence of unauthorised practices, with limits regularly exceeded and results smoothed or transferred between traders.

Kerviel hid his unauthorized trading activity through three concealment mechanisms: (1) the entry and cancellation of fictitious transactions; (2) the entry of pairs of fictitious reverse transactions; and (3) the booking of intra-monthly “provisions” that offset earnings or losses.

First, and most simply, Kerviel entered fictitious transactions into the system in amounts sufficient to cover his unauthorized positions that were then employed in the bank’s risk and valuation calculations.  Bank records show that Kerviel entered 947 transactions of this type.

Second, Kerviel entered matched trades of equal quantities at different prices to generate fictitious gains and losses. For example, on March 1, 2007, Kerviel entered a purchase for 2,266,500 Solarworld shares at EUR 63 and the sale of the same number of shares at EUR 53, creating a fictitious loss of EUR 22.7 million. Bank records reveal 115 transactions of this variety. 

In order to avoid discovery through back-office attempts to confirm his trades, Kerviel cancelled these fictitious trades prior to confirmation, settlement, or control. To gain time, he entered transactions with some lag between the trade date and the confirmation, control, or settlement date.  On the rare occasions when a supervisor or middle or back-office personnel questioned Kerviel regarding these transactions, he lied and forged emails or other confirming documents as support.

The third technique Kerviel employed, a mechanism known as a “provision flow,” is designed to correct modeling bias and supposedly is reserved only for trading assistants.  This technique allowed Kerviel to enter positive or negative amounts modifying the values calculated by the front-office valuation system. Kerviel cancelled these provision flows before the end of the month, the only time when they were monitored. The bank’s records show that Kerviel entered such provision flows nine times.

All facts, figures, and calculations used in this post, and the sources and citations from which they are derived, are detailed here.

In my next post, Kerviel’s Fake Trades: Genius Or Copy Cat?, I’ll illustrate that these cover up techniques employed by Kerviel were remarkably similar to mechanisms successfully employed by prior rogue traders. 

Image Source

Related Posts:


Kerviel’s Fake Trades: Genius Or Copy Cat?
On Warning Signs II: Follow The Money
On Warning Signs: You Can’t Get There From Here

Rogues Versus Scapegoats

Kerviel Trial Opens to Fanfare


Société Générale: Back In The Saddle Again



Jérôme Kerviel to Société Générale: Stand By Your Man

Masters of the Game

Author Kim Eisler, whose previous works have profiled Justice William Brennan and examined the collapse of Finley Kumble, has a new book set for publication in a week or so.  In "Masters of the Game:  Inside the World's Most Powerful Law Firm," Eisler shines the spotlight on Williams & Conn0lly.  Here's a brief description from amazon.com:

In Masters of the Game, Eisler sets out to demonstrate how the disciples of Edward Bennett Williams went beyond anyone’s expectations and came to occupy key roles in American culture and business.  In the last ten years of his life, Williams, the founder of Williams and Connolly, often said he was building not just a law firm but a monument.   Masters of the Game is not only about a law firm, but about how the philosophy and practices of this particular law firm have spread out beyond Washington to dominate business, finance, sports and the American psyche itself through its influence with past, present and future political, corporate and media figures.

The current issue of the ABA Journal has an excerpt here, and you'll find an editorial review (by Kirkus) here.

More Thoughts on Missing Influences in the Legal Academy

Thanks to everyone who has contributed responses to my question about missing influences in the legal academy.  I have a few reflections prompted by the comments to date. 

Some of the back-and-forth has gestured toward the difference between citations and influence.  (I know this is a much-debated topic, but I thought it sufficiently relevant to the comments to raise it here).  Citations can’t really get to “influence” in the spirit of my question, i.e., “intellectual engagement by a broader section of the legal academy.”  For example, as one of the comments to my earlier post pointed out, Wittgenstein draws plenty of citations for throwaway mentions of “language games” and “forms of life” (and I would add to the list “family resemblances,” “private language,” and the relationship between meaning and use).  But those citations don’t correspond to widespread intellectual engagement.  The legal academy would be a different place if we all read Wittgenstein (and the same goes for a number of the other names mentioned, albeit in very different ways).

I assume that most people who offered responses have spent substantial time reading, reflecting upon, and perhaps even writing about the authors they nominated.  That kind of familiarity can’t be easily replicated, and in the real world, it won’t be.  This means that for the “missing influences,” we’ll likely be left with name recognition rather than intellectual engagement—thin citations in articles and “thoughtful nods” at workshops and conferences (the ones that convey the appearance of “I think that’s a very perceptive interpretation of [x]” to mask the reality of “I’ve never read anything by [x]”).  And with today's effortless access to information, more of us will convince ourselves that we have transcended name recognition with intellectual engagement when in fact all we have done is taken a few minutes to read a summary on Wikipedia. 

Is there anything we can do about this?  Some of us benefit from assigning authors we’d like to know better in seminars, but that can be risky if we pass along half-baked interpretations to our students.  Another possibility is the virtual reading group, like the one currently underway at Public Reason on Amartya Sen’s The Idea of Justice.  But virtual reading groups offer little accountability for consistent reading or mutual participation—participants are likely to check in and out of the discussion and thus minimize the benefits of sustained engagement with a text and community of readers. 

Of course, there is also that forgotten practice of the non-virtual reading group, where people read a common text and meet together to talk about it, maybe even over good beverages.  Anyone in the Triangle want to read Wolin, Wittgenstein, or Hauerwas this summer?   I’ll bring the beer—it’ll probably be Duck Rabbit.

San Diego Law Dean Kevin Cole Stepping Down

A few days ago, University of San Diego Law School Dean Kevin Cole announced he will be resigning his position as of next summer.  He has been a member of the USD law faculty since 1987 and dean since 2006.   I would expect this to be a pretty attractive opportunity.  When it comes to external hiring, Daniel Rodriguez set the bar pretty high.

John Garvey Named President of Catholic University

Long-time Boston College Law School Dean John Garvey has just been named president of Catholic University.  Many congratulations to Catholic; they are very lucky to have him!

Garvey's letter to the BC Law community discussed his love of the school and some of the successes of his term:

I have loved my 11 years at Boston College, and I am so thankful to have been able to lead one of the best law schools in the nation ....

I am proud of what we have accomplished together — the world-class faculty we have added to what was already one of the best groups of law professors in the country, the launch of our first-ever capital campaign, the rebirth of our alumni association, the establishment of our first LL.M. program and of the Center for Human Rights, and the ever more impressive classes of remarkable students who pass through our doors each year.

And now the speculations can begin about who the next dean of Boston College Law School will be....  That will be one of the most sought-after deanships in a long time.  In the Jesuit tradition, the faculty and students are fabulous and the school has terrific placement in firms, as well as public interest.  Garvey's letter concluded:

Boston College is unlike any other school I have been involved with in its focus on educating the whole person – mind, body, and soul. Our faculty, staff, and alumni’s mentoring relationships with students are unique, and their dedication is inspiring....  I believe this is the best place in the nation for a student to learn what it means to be a great lawyer.

Paul Caron has more at taxprof.

Law Dean Interview Questions ...

With gratitude to "LLL" who commented on my post from yesterday, the suggestion was made that with the upcoming dean hiring season almost upon us, we might like to think about good questions for selection committees and faculties to ask dean candidates.

Another book I might recommend in this context is Alan Deutschman's Walk the Walk:  The #1 Rule for Real Leaders.    Here's some of my take-aways from that book and also some suggestions for good questions to ask during law dean interviews.  But naturally I would welcome everyone else's thoughts.

One thing that Deutschman does fairly early in the book is to distinguish between "leaders" and "stewards".  He defines a "leader" as a person who will "strive to change the ways that other people think, feel, and act" (p xi) and he describes a "steward" as a person who runs things perhaps more efficiently than their predecessors but who don't try to change the culture's entrenched values and priorities (p xi-xii).  Thus, for those of us embarking on dean searches, it might be a good idea to work out whether we're looking for a "leader" or a "steward".  Each will likely exhibit different qualities and each may be good for a given organization at a particular point in time.   Probably the type of questions you ask in an interview will vary depending on whether you are looking for a "leader" or a "steward".  If you're looking for a leader, you may be asking about the person's new priorities for the school and how the leader would go about implementing change.

Towards the end of the book, Deutschman pulls together a set of qualities that he feels are inherent in good leaders.  I would assume that not all candidates for leadership positions would immediately or obviously exhibit all of these categories, but for what it's worth, he describes the qualities of a good leader as:  (a) leaders must have exceptional FOCUS and be able to highlight the one or two things that are most important to the cause; (b) leadership depends on EMPATHY; (c) leaders need CONSTANCY/RELENTLESS in pursuit of their objectives; and, (d) leaders should have an extraordinary BELIEF in their own ability to overcome obstacles. (pp 164-165)

So what questions might selection committees ask to get at some of these qualities?  Presumably many of these qualities will be desirable, but perhaps less important, if the school is seeking a steward, rather than a leader.

Might we ask things like:

1/ What would be your Top 2 priorities for the school?

2/ How would you handle conflicts between your stated priorities and other important issues? eg If one of the priorities is "great teaching", how might this impact on time for faculty to do scholarship?  If one of the priorities is "getting jobs for students in a tough market", how might this impact on allocation of resources more generally?

3/ What would you do if one of your proposals for change met with significant resistance from faculty and/or staff?

4/ What is your definition of "consensus"?  And how important is it in making change?

5/ How would you deliver bad news to staff or faculty?

Any other questions that might be useful?

On Warning Signs II: Follow The Money

 As I noted in my last post, On Warning Signs: You Can’t Get There From Here, a failure to inquire into unusual growth in profits, risk, or trading volume is not unique to Jerome Kerviel’s Société Générale experience.  Instead, it is a common pattern across modern rogue trading scandals.

For example, in February 2002, Allied Irish Banks (AIB) -- Ireland’s second largest bank -- disclosed losses of $691 million by John Rusnak, a foreign exchange trader in its Baltimore, Maryland office. AIB took a one-time charge against earnings that eliminated over 60% of 2001 earnings and severely depleted its capital.  Subsequent investigation turned up internal documents indicating that Rusnak was responsible for 95% of the subsidiary’s FX risk and that 80% of Rusnak’s trades were speculative.   Yet such facts failed to prompt inquiry or heightened oversight.

Similarly, as noted in the Price Waterhouse Report prepared for the Singapore Minister of Finance regarding the Nicholas Leeson/Barings Bank debacle:

Mr. Leeson’s product managers accepted the reports of his considerable profitability with admiration rather than skepticism. They perceived no irregularity in Mr. Leeson’s trading activities despite the inherent limit to the profit potential of Mr. Leeson’s arbitrage activities. This was because the price differences that were arbitraged were small, and large volumes had to be transacted in order to realize meaningful gains. However, as the volume of such transactions increased, this tended to reduce the price differences, and therefore the potential profit from arbitrage.

At the time of Barings’ collapse, its positions on the Osaka exchange were eight times greater than the bank’s nearest rival, and its positions on the Singapore exchange were even larger. 

 The most extreme example, however, has to be Joseph Jett at Kidder Peabody. (If you teach only one rogue trading case it has to be this one.  The facts have everything: sexcapades, racial tension, financial shenanigans, and more).  From mid-1991 through the first quarter of 1994, Joseph Jett reported over $264 million in profits from STRIPS trading, supposedly earned through arbitraging small differences between the trading prices of U.S. government bonds and their component STRIPS. 

There’s one problem with this simple story, however.  The market for Treasury securities is highly liquid and actively traded, reducing the potential for arbitrage profits.  Prior to Jett’s employment, the record profit at Kidder for STRIPS trading in a single year was fifteen million dollars.  Jett’s reported profits from STRIPS trading exceeded that amount in a single month four different times.  On a single transaction alone in 1992 Jett recorded an apparent profit of $12.9 million and on another, in 1993, a profit of $24.2 million.  Based on Kidder’s prior STRIPS profitability, such large profits on STRIPS trading would have been unusual for any trader, much less one with Jett’s limited experience in government bond trading and prior disappointing track record.

In reality, Jett’s reported profits were produced through “forward recons” with the Federal Reserve (a non-cash trade of economically equivalent securities, having no real monetary significance, which I describe in more detail here) and a fictitious pyramid scheme enabled by an anomaly in Kidder’s recording and accounting systems that hid Jett’s real trading losses of $74.7 million. By May 1993, Jett’s trades had grown to represent 40–50% of all recon activity in the United States and accounted for 45% of Kidder’s 1993 profits.  His forward recon instructions on some bonds were so large that they exceeded the world-wide availability of the component STRIPS.

In sum, infamous rogue traders don’t typically jump out of the starting gate with large losses.  Instead, they often begin with large gains (Toshihide Iguchi of Daiwa Bank is a prominent exception).  Profitability alone should not, of course, raise risk management suspicions.  But when those profits are improbable relative to the authorized trading strategy, market size, and the trader’s seniority, prior success, and expertise, then it is reasonable to expect some follow-up from risk management and, if necessary, more senior management.

All facts, figures, and calculations used in this post, and the sources and citations from which they are derived, are detailed here.

In my next post, Denial: It Ain’t Just A River In Egypt, I’ll discuss what happened in these cases when skeptics questioned the trading strategies involved.

Image Source Top (Nick Leeson)
Image Source Lower

Related Posts:

Kerviel’s Fake Trades: Genius Or Copy Cat?
Kerviel’s Fake Trades: The Anatomy of A Cover-Up
On Warning Signs: You Can’t Get There From Here
Rogues Versus Scapegoats
Kerviel Trial Opens to Fanfare

Société Générale: Back In The Saddle Again


Jérôme Kerviel to Société Générale: Stand By Your Man

Who Are the Missing Influences in the Legal Academy?

I’m going to dabble in my first “list and question” post.  These can be fun and useful ways to learn about one another, and they also push the genre of blogging into more of a conversation than a monologue (not that I’m complaining about the opportunity for the latter).  

Here is the question:

Who are the top three thinkers that you doubt most law professors read but wish they did? 

This is a question about missing influence rather than a “favorite authors” list.  The categories probably overlap for many of us, but they are conceptually different.  As I reflected on my own answers, one of my thoughts was that my own work would be better understood if more people were familiar with the people on my list.

The wording of the question is meant to specify a desire for intellectual engagement by a broader section of the legal academy rather than simply increased name recognition.  (I have a long list of famous people whom I could name and fit superficially into a conversation but whom I’ve never taken the time to read in any depth.) 

Guidelines: (1) people outside the legal academy; (2) feel free to include a brief word about why you wish they were known; (3) have fun.

My nominations after the jump.  

You Know You're Getting Old ...

... when the Apple sales clerk, who is training you and your wife on your new computer, says:

"I'm not familiar with Corel Word Perfect.  What is that?"

This transition (lifelong Microsoft PC users) could be challenging!  Thank goodness my wife and I have daughters, ages 9 and 3, who can answer all of our technology questions!

(Previously I thought I was getting old when some of my students, on an exam, used a masculine pronoun when mentioning legendary film star Greer Garson.)

More on Management Style

I guess we can blame last year's dean search for my sometime obsession with management books, but this weekend I read another one:  Stephen Young's Micromessaging:  Why Great Leadership is Beyond Words.

This is a relatively quick and easy read and it deals with the largely non-verbal aspects of communication that often get in the way of effective messages being sent and received between co-workers. 

While much of the book seems like common sense, it's a good idea to occasionally think about non-verbal aspects of communication and how they get in the way of effective management and teamwork.  Some of the more salient take-aways for me in terms of law school hiring and management were:

1/ Young's suggestion that in the case of diversity hiring and retention, we have moved from an era of "macro-inequities" which are pretty obvious and blatant forms of discrimination in the workplace to "micro-inequities" that may disproportionately affect women and minorities in the workplace and which are much more subtle and difficult to deal with than blatant sexism or racism.

2/ Young's assertion that some of the more intellectual and academically minded amongst us are the least effective at being aware of subtle non-verbal communications cues that may belie the verbal messages we are sending to each other.

3/ The idea that the most effective managers actually communicate differently with different people to bring the best out of everyone.  This makes me wonder whether those of us interviewing deans over the years should be asking standard questions like:  "What is your management style?"  Might it be better to ask something like:  "How do you go about bringing the best performance out of different staff/faculty?"

On Warning Signs: You Can’t Get There From Here

 In my last post on this topic, Rogues Versus Scapegoats, I argued that, while Kerviel is hardly the “pawn for profit” his lawyers contend, Société Générale bears ultimate responsibility for failing to prevent Kerviel’s massive losses.  The bank ignored major warning signs regarding the size and scope of Kerviel’s trades, leading to a reasonable inference that at least some supervisory personnel likely turned a blind eye to Kerviel’s trading irregularities. 

At the trial on Friday, Benôit Thaillieu, a former manager at Société Générale who left the bank in 2006 and now heads an interior design company, reiterated this point as a defense witness, arguing, “They could not have been totally unaware.”

A series of alerts, accounting and trading procedures, would have made Mr Kerviel’s supervisors aware of the risks he was taking, said Mr Thaillieu, who left his position as supervisor of the Delta One trading desk before Mr Kerviel joined the unit. “For me, it’s a certainty,” he said.

Mr Kerviel’s trading profits were extraordinarily high and would have indicated that he was dealing outside his official remit, he said.

A little background information will help put this testimony into perspective. One of the most important warning signs ignored by Société Générale involved Kerviel’s earnings, which grew six-fold between 2006 and 2007 to constitute a substantial percentage of total desk (59%) and division (27%) earnings.  These levels should have prompted further inquiry at Société Générale, particularly given Kerviel’s low seniority and experience, as well as his authorized trading strategy.

Indeed, Kerviel’s authorized trading activity could not possibly have accounted for such large profits. To illustrate, Kerviel claimed profits in 2007 of EUR 43 million—EUR 25 million from proprietary trading (turbo warrant arbitrage) and EUR 18 million from client trading.  However, Kerviel’s authorized trading activity can explain only EUR 3 million in proprietary trading profits.  As explained in the General Inspection Department (“Mission Green”) report:

We have reconstituted, trade by trade, the earnings generated by arbitrage on competitors’ turbo warrants carried out by JK [Jerome Kerviel] and another trader from DLP. In total, these earnings are valued at EUR 5.5 million, including approximately EUR 3.1 million attributable to JK and EUR 2.3 million attributable to the other trader (according to the most likely case scenario.)

This means that not only Kerviel’s now-infamous 2008 losses, but a significant portion of his 2007 profits, on which he was paid a substantial bonus, are attributable to his “rogue” trading.  In other words, in 2007 when Kerviel made money, he was not a rogue.  In 2008, when he lost money, he was a rogue.

This failure to inquire into unusual growth in profits, risk, or trading volume—particularly when that growth is inconsistent with the trader’s experience level, prior performance, or authorized trading strategy—is a common unifier of financial institutions damaged by rogue employees.  As I’ll illustrate in my next post, this pattern is shared by rogue traders John Rusnak at Allied Irish Banks, Nicholas Leeson at Barings Bank, and Joseph Jett at Kidder Peabody, among others.

All facts, figures, and calculations used in this post, and the sources and citations from which they are derived, are detailed here.

Image Source

Related Posts:

Kerviel’s Fake Trades: Genius Or Copy Cat?
Kerviel’s Fake Trades: The Anatomy of A Cover-Up
On Warning Signs II: Follow The Money
On Warning Signs: You Can’t Get There From Here

Rogues Versus Scapegoats
Kerviel Trial Opens to Fanfare

Société Générale: Back In The Saddle Again


Jérôme Kerviel to Société Générale: Stand By Your Man

Baseball Trivia

I spent my entire career (more than twenty years) with one team.

Although I finished my career with over 2,800 hits, I am probably best known for my defensive prowess, which allowed me to win more than a dozen Gold Glove awards.

I was elected to baseball's Hall of Fame in my first year of eligibility.

And I hold two dubious records:  I played on more losing All-Star teams (15) than any other player, and I hit into more triple plays (4) than any other player.

Who am I?

Pictured:  HOF'er George Sisler (one of fifteen players featured in the 2009 Topps Legends of the Game Career Best set), who hit into three triple plays in his career.

Playboys Bad. Government Bonds Good.

 Creative financing from the world’s most indebted nation . . . Maybe Greece should try this. 

From the FT:

Stuck with the tricky job of making debt issued by the world’s most indebted government an attractive investment prospect, Japan’s ministry of finance has hit upon a novel sales pitch.

A high-profile advertising campaign to persuade millions of small-time investors to buy the country’s sovereign debt has gone for raw sex appeal: “Women have a thing for men who own JGBs!! . . . right!?”

Owning bonds might not be everyone’s idea of the way to a woman’s heart but, according to the finance ministry advert, women prefer men who invest in solid government debt because they are sensible investors.

And this from Alphaville:

…our colleague Bill O’Donnell reports that a new Japanese Ministry of Finance advert says that Japanese women prefer men who invest in government bonds, as ‘Playboys are no good’. This tells you all you need to know about why you should buy bonds. Even when someone is trying to be bullish govvies – as the government is, good for them – they are still seen as a dull last resort anti-playboy investment. We suggest you will see far greater (positive) returns in 30-yr govts in 2010 than you will see (negative) return in equities. And are JGBs boring? You decide. 10-yr JGB total return YTD: +2.1%, NIKKEI total return YTD: -9.9%. Seems to me that if you want to finance that playboy lifestyle you would do far worse than buying some bonds!

According to commenters at Brad DeLong’s blog, the ad is above.  (I don’t read or speak Japanese, so I’ll take them at their word).  Asks DeLong:

Does this mean that Japan is still very, very far away from the limits of its debt capacity? Or very close to them?

Japan is a somewhat strange country in many ways...

Michael Smerconish: Pot, or Kettle?

Radio talk show host Michael Smerconish has an op/ed in today's Washington Post decrying "the media's role in shaping opinions."  He indicts his industry (but of course exempts himself from the indictment) for presenting just extreme views rather than nuanced ones, and cites as examples some times when he felt he was either pigeonholed or passed over as a guest by CNN and Fox.

Smerconish knows whereof he speaks.

Six years ago, Fox News personality Michelle Malkin published a book defending the incarceration of Japanese resident aliens and Japanese Americans during World War II.  She was of course received with open arms by the right-wing media, scoring opportunities to plug her revisionist nonsense with O'Reilly, Hannity, and the other usual suspects.  My friend the historian Greg Robinson and I tried to use my blog to refute her thesis, but needless to say we had a harder time securing radio and TV time than Malkin did.

One hopeful moment came when I was invited to debate Malkin on ... Michael Smerconish's radio show in Philadelphia.

Here's what happened (as I recounted it that day, September 1, 2004, on my solo blog, IsThatLegal?):  

Life on a Fox News Farm Team

I was booked this morning to go on Michael Smerconish's radio program on WPHT radio in Philadelphia, right after a segment he did with Michelle Malkin, to rebut her claims about the Japanese American internment.

I listened, on hold on the telephone, as Michelle did her fifteen minutes of allegations of "large espionage networks up and down the Coast," "Japanese American spies in the U.S. military," the critical information these Japanese American spies gathered, the lies about U.S. history that are peddled by leftists and ethnic grievance groups, and the like. 

She had a receptive audience in the host, Smerconish, who has his own book in favor of racial profiling that's about to come out (and that's blurbed, on the cover, by Sean Hannity). Smerconish used the interview as an opportunity to fawn all over Malkin ("Is there anything we disagree about, Michelle, besides the Bush daughters?"), hawk his own book, and brag that he's going on The O'Reilly Factor next week. ("Wow!" exclaimed Michelle.)

The interview with Malkin closed with this exchange:

Smerconish: The bottom line here, Michelle, is don't let your kids be taught that we did despicable things to the Japanese Americans during World War II, 'cause it ain't true.

Malkin: That's right, Michael.

Then the show hung up on me.

The producer promptly left me a phone message telling me that they had "an important call from the Republican National Convention" that they needed to take. But of course they'd be interested in having me on some other time, blah blah blah.

If Smerconish is (as it sounded to me) auditioning for the Big Time (that is, a show on Fox), he's already got the "fair and balanced" thing down pat.

posted by Eric 7:56 AM

PS:  Smerconish's show never called me back.