Spot the fault line

 

The overriding lesson from the calamities in the global financial mess was that the monitoring systems were inherently flawed.

Last week in what is largely viewed as a symbolic process Fabrice Tourre the former Goldman Sachs Banker went on civil trial in New York  on charges of defrauding investors .

There is no dispute that, in exchange for a $15m fee to Goldman, Mr Tourre helped Paulson & Co, a hedge fund, create a complex security named Abacus out of mortgage-backed bonds in order for the fund to profit from an anticipated collapse in the housing market. For Paulson it was a spectacular success; for those on the other side of the trade, not so much

 An email written by Tourre has become a metaphor for the whole financial mess which engulfed global markets and institutions. In January 2007 as the subprime meltdown was beginning Tourre wrote “The whole building is about to collapse anytime now. Only potential survivor, the fabulous Fab...standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstrosities!!!” 

Exotic trading products and programmes were created which like the Frankenstein monster quickly became uncontrollable. Risks were taken on an unprecedented scale and those supposedly monitoring risk were “asleep at the wheel”. 

Recklessness was encouraged and became the default position. There were no checks and balances – it became for the participants in the so-called casino bankers a safe bet.

What’s the worst that could happen following a spectacular flame out?

Maybe you lost your job and had to move to another bank or institution. Get it “right” and the rewards were sky high.

Whenever there is a bonus culture unless the supervisory systems are rigorous there will be potential for abuse. 

Whether through greed or stupidity there will always be people willing to take potentially catastrophic chances.