Predictably, there is much hand-wringing in the press today (16th September 2011) about bankers and their inability to manage their own, never mind other people’s, money.
There is something in this, though this inability is hardly new; it just seems to manifest itself less frequently than it used to – assuming you ignoreÂ JÃ©rÃ´meÂ Kerviel of course…
So, not quite so infrequent after all then; in fact, because I remember Sumitomo, Daiwa, Morgan Grenfell, Allied Irish, Orange County, Metallgesellschaft and others – all operational risk losses of the mid 90s and early 00s – IÂ justÂ think we have been going through a quiet patch recently.
Also, compared toÂ Kerviel at â‚¬4.9Â billion, this loss isn’t that big – though it is not easy to type that a Â£1.3bn loss ‘isn’t that big’. Â Several of the above were bigger than Adoboli though curiously, it is almost exactlyÂ equivalent to the loss Nick Leeson caused to Barings – if you trend Leeson’s Â£827m at 2.7% (the average inflation rate since 1995 when Barings collapsed).
So, is it appropriate to say “nothing new to see here – move along”?
Well first, it is far too early to say anything sensible about this loss because, so far, we basically know absolutely nothing about it. Â Who did what, who said what and who knew what and most important, when all was done, said or known may take years to be established and will definitely take longer to be publicised by a Swiss bank.
That all said, there is nothing startling about the amount of the loss, as far as we can tell so far, and I don’t expect there will be anything too surprising about the detailsÂ when we hear them,Â though in insurance porn terms, I am sure they will be lurid.
What would surprise me is if the FI sector of the insurance market has been able to provide meaningful coverage for this loss; UBS may not buy any coverage because of this. Â More surprising still would be that we pay the loss quickly – even if it is evidently covered; we just can’t/don’t work that way – more on that another time.
But it is because we can’t work like that, that aÂ friend and I co-wrote this report to the Bank for International Settlements in 2001. Â We were responding to a request from them for ideas about how operational risk might be transferred in such a way that insurance became an effective back-up to a bank’s operational risk capital.
I think we would write it slightly differently today but, given that the losses haven’t gone away and the coverage for them remains inadequate, I am not sure we would change its basic premise.Â