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Credit Suisse Traders Manipulated IT Systems To Hide $500m Losses
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."
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.
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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?
Self proclaimed typo king, and inventor of the bear destroying coffee table (patent not pending).
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