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What Makes a Rogue Trader?

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In February 1995, one of the most respected, prestigious and oldest financial institutions in the world – Barings Bank – was utterly destroyed by just one man: Nick Leeson. This venerable merchant bank, which dated right back to the mid-18th Century, found itself the victim of criminal recklessness on a truly jaw-dropping scale. Leeson’s antics introduced a new buzz phrase to the world: “rogue trader”. And there have been other Leesons since then, causing havoc inside seemingly invulnerable institutions.

In the words of Gordon Gekko, greed is good!

Nick Leeson himself seemed to be just another high-flying financial whizzkid, moving to Barings after establishing his credentials at the equally esteemed private bank, Coutts. He got himself noticed with his trading prowess, and was given a plum job in the Far East, trading on the Singapore International Monetary Exchange in the early 1990s. At first, everything seemed to be going swimmingly. He was a driven and fearless trader, making big profits for his masters and enjoying a hefty salary for his efforts. But Leeson’s fearlessness soon morphed into recklessness.

He began to make unauthorised trades for bigger and bigger stakes, and his bosses were none the wiser because he was hiding his losses in an “error account” which was ordinarily used to correct mistakes made by traders. This particular error account had originally been set up because of another trader, whose mistaken decision to buy rather than sell certain contracts had cost the bank £20,000. This was peanuts compared to the losses Leeson was now concealing in the account, and in 1995 the final straw was an act of nature: an earthquake in Japan which disrupted international markets just when Leeson was betting everything the other way.

All in all, Leeson lost Barings Bank just under £900 million. But at least he apologized, leaving a note saying “I’m sorry” before fleeingSingapore in February. He was apprehended in Germany, and his face was soon plastered on front pages around the world – a poster boy for rampant, unchecked capitalism. Barings Bank, meanwhile, simply collapsed. But was this just down to one ego-crazed cowboy, or was a certain universal mindset to blame?

Leeson himself, who served his jail time and now speaks vocally about the risks within corporate culture, has placed a lot of the blame on a “macho culture that’s evolved.” Speaking bluntly, he says that “when things go wrong, there’s a certain age group that is usually involved: young men.”

It’s certainly true that the vast majority of traders are men, and that it’s one of the remaining realms of frenzied, testosterone-fuelled competition. There was even a 2008 study called “Endogenous steroids and financial risk taking on a London trading floor”, which concluded that “a trader's morning testosterone level predicts his day's profitability… Our results suggest that higher testosterone may contribute to economic return.”

Another young man who caused financial catastrophe, a whole generation after Leeson, was Kweku Adoboli. Born in Ghana and schooled in the UK, he enjoyed a privileged upbringing and landed a job with the powerful Swiss bank, UBS. Like Leeson, he was young and fiercely ambitious. Like Leeson, he started making unauthorised trades, recording false information to hide his increasingly catastrophic risks. He eventually rang up a bill of well over £1 billion for UBS, and the bank was very fortunate not to go the way of Barings.

Convicted in 2012, Adoboli has – again, like Leeson – put much of the blame on the cutthroat culture around him, and the crushing pressure to win big at all costs. In his words, “if investment banks continue to chase the same level of profitability as they have in the past, the only way to generate those profits is to take more risk.” In this respect, according to Adoboli, the senior staff are as culpable as the cowboys who get busted. He’s also shed fascinating light on the mindset of a rogue trader: the feeling of having a god-given right to bend or break the rules in the pursuit of profit: “I am being put on a pedestal. How can it be wrong?”

But some don’t buy it, seeing this kind of talk as just passing the blame on. After all, most traders don’t turn rogue. In Adoboli’s trial, UBS employees testified they had NOT felt pressured to take reckless risks. And Adoboli’s insistence that he didn’t even feel like he was ever committing a crime, because “everything I had done was for the bank and for my colleagues”, also doesn’t ring true. After all, he’d been consciously recording false data to cover up his immense losses. And he had also splurged his own personal finances on his trades, forcing him to seek out payday lenders to tide himself over.

In other words, he was like an out-of-control gambler. And this, ultimately, is perhaps the best way to sum up rogue traders. They are essentially addicts at the gaming table, but even more dangerous because they’re playing with other people’s money, and have the justification of a lofty job title backing up their every dangerous move. After all, in the words of Wall Street’s Gordon Gekko, greed is good.