Real Time vs Analysis

September 19, 2011 § 4 Comments

It happens every day, every hour, minute and second.  Stuff.  Stuff happens, and lots of it.  Every so often, something happens that make us go, “oh, that’s big”.  And sometimes so “big” that we scramble to react to either take advantage or take cover; to move money in or out; run for higher ground or head out to sea.  Sometimes we have a bit of notice, but other times we don’t.

Previously, I wrote about risk, fraud and how Barings Bank was brought down by a single rouge trader.  Well, it happened again just a few days ago.  UBS AG, a large Swiss bank appears to have lost somewhere in the neighborhood of $2 Billion.  The news caused its stock to promptly drop; closing 11% lower than the previous day’s close.  Moody’s Investor Service quickly reacted suggesting they would review UBS for a possible downgrade; citing concerns that it’s not adequately managing risk.

It’s much too early to determine how this trader pulled off his scheme.  Early information suggests he may have manipulated back-office operational systems as he previously worked in back-office operations and would have had that knowledge.  Did UBS have a policy to restrict back-office workers from transferring to front-office trader positions?  They didn’t comment.

There is much that needs to come to light.  Was this the work of the single trader, Kweku Adoboli, that is currently being implied or were others involved?  What controls were in place to prevent these type of trades and why did they fail?  How long did it take for monitors to catch the rouge activity and did they prevent additional potential damage? 

To give a sense of size, it only took Nick Leeson’s $1.3B cheat to bring down Barings in 1995.  Jerome Kerviel devised a scheme that cost Societe Generale $7.16 Billion in 2008.  Other scandals have impacted banks over the years and the fraudulent events don’t seem to end.  Regulations can be implemented and made more stringent; auditors can review organization’s processes for compliance to those regulations, but still big stuff happens.  It’s the kind of big stuff that wipes out all other assumptions.  You can be the finest analyst in the universe, performing all the due diligence necessary to make the most prudent investments.  You believe in UBS, the fact that they brought back senior leadership that they are serious about reform.  Oswald Grubel were supposed to be turning around the troubled UBS, but it appears he and his leadership team was just not that concerned about managing operational risk.  Simple bottom line is: one event can be catastrophic erasing all other assumptions.

So, the questions that are most pertinent:  Which operational events need real-time monitoring?  What events need process controls in place to automatically prohibit additional risk exposure?  How can managers respond in real-time to both opportunities and adverse situations?  As Pete Seeger adapted from the Book of Ecclesiastes, “there’s a time to gain, a time to lose, a time to rend, a time to sew”.  Similarly, there is a time for analysis and there is a time for real-time response.  All the analysis in the world cannot determine the future.  As the Heisenberg Uncertainty Principal states; the more precisely one property is measured, the less precisely the other properties can be controlled or determined.   In other words, the mere act of observance imposes yet another factor into the set of conditions.  There are no absolutes about tomorrow and there is no such thing as risk-free.  So, while I point out the immense advantage that doing your homework will bring with a previous blog post in interconnectedness, at the end of the day, a single event can wipe out all of your assumptions. 

Well, I know what you’re thinking…. that sucks.  First you tell me that I should do fantastic amounts of due diligence to identify opportunities, but then you say, “ahhh, it’s all a waste once a single unexpected event strikes.”  Okay, I can see that paradox or contradiction, but really what I’m saying is: you have to do both.  Good operational process management is about analysis of the details; of every single activity; every single owner, reviewer, regulation and risk.  And yet, it’s also about agility.  What do we do when things don’t go as planned?  What do we do when the proverbial poop hits the fan?  Can we analyze each activity for its risk exposure?  Can we find methods and control activities to mitigate against adverse events… especially the catastrophic ones?  And can we buy insurance to position ourselves for gain if adverse events strike?  Absolutely, I say!  Why some organizations don’t, especially financial institutions that are particularly vulnerable, is beyond me.  Sometimes, it’s just incompetent management, but often it’s a simple lack of appreciation for how solid operational process management requires a sizable investment in process thinking, risk management and development of a process improvement culture. 

Fortunately, a lot is being done during this generation to advance process-based thinking and to raise the level of consciousness about business process management and its impact on corporate governance and risk.  But, it’s happening slowly.  Maybe events like last week’s UBS debacle will open a few eyes…. let’s hope so.

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§ 4 Responses to Real Time vs Analysis

  • Aamir Khan says:

    Its really doing the basics right every time. I have not read enough to really understand how this has happened, but I am confident that proper care and adequate controls would have prevented this or at least managed the exposure. Its no magic, other banks are doing it and hence not all banks are failing.

    Self assessment, self regualtion, corp governance should take the lead in managing these risks. FIs mainly focus on credit, currency, liquidity, market and other Financial Risks, its time to really start paying attention to operational risks as well.

    People do what you INPECT them to do and not what you EXPECT them to do – this is what my boss believes in and I endorse it as well

    • rspeck65 says:

      Thanks for the comment, Aamir. I agree with your statements; as well as your boss’ assertion. There are technologies that can help organizations prevent the vast majority of fraudulent trades, but where there’s a hole, there will be criminals there to take advantage. There’s no substitution for manual controls and diligent inspections.

  • Mike says:

    Oswald Gruebel has led the loss of $40 billion in shareholder value in the last year. Corporate culture and strategic risk. Plus the BOD should resign

  • […] BPM and Risk – Rob Speck Why some organizations don’t, especially financial institutions that are […]

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