Banking management – asleep at the wheel

A City trader who lost £1.4bn ($2.2bn) of Swiss bank UBS's money has been jailed for seven years after being found guilty of two counts of fraud.

According to a spokesperson for the City of London police Quote this was the UK's biggest fraud, committed by one of the most sophisticated fraudsters the City of London Police has ever come across.

To all those around him, Kweku Adoboli appeared to be a man on the make whose career prospects and future earnings were taking off. He worked hard, looked the part and seemingly had an answer for everything.

But behind this facade lay a trader who was running completely out of control and exposing UBS to huge financial risks on a daily basis.

Rules put in place to protect the bank's position and the integrity of the markets were being bypassed and broken by a young man who wanted it all and was not willing to wait.

When Adoboli's pyramid of fictitious trades exceeded trading limits and non-existent hedging came crashing down, the repercussions were felt in financial centres around the world. Unquote

To those not familiar with the culture of “investment banking” the above will be seen as just desserts for yet another rogue trader.

There is however a much more salutatory lesson to be drawn from this latest banking debacle. In his defence Adoboli said that traders were encouraged to take risks and carry on until they received a “slap on the wrist”. Anyone who has worked in a trading environment would recognise this as a not unusual scenario.

There is no doubt that Adoboli committed fraud but at the same time should not his superiors also have faced some close scrutiny for their part in the fiasco?

At the very least they are guilty of dereliction of duty/negligence.

However as we have seen in the recent past those who were in charge of the Banks were too pre-occupied with their own rewards to spare time in managing the interests of their shareholders.

Euro woes continuing

The Eurozone has returned to recession as the region's debt crisis continues to hurt demand.

The economy of the 17-nation bloc contracted by 0.1% between July and September, after shrinking 0.2% in the previous three months,.

The Eurozone was last in recession in 2009, when the economy contracted for five consecutive quarters.

The news follows on from millions of workers in Europe holding a day of action against austerity measures.

Protests in Spain, Italy and Portugal were marred by violence.

Countries such as Greece and the Republic of Ireland that have been bailed out by international lenders continue to see their economies shrink. Meanwhile larger economies such as Spain have imposed spending cuts in an attempt to avoid having to ask for a bailout.

The austerity measures in many countries - mostly in southern Europe - have combined tax rises with cuts in salaries, pensions, benefits and social services.

"We are now getting into a double dip recession which is entirely self-made," said Paul de Grauwe, a professor at the London School of Economics. "It is a result of excessive austerity in southern countries and unwillingness in the north to do anything else.”

Apart from the social cost the spectre of unemployment represents a major threat to economic recovery within the EU together with all the global implications it brings.

The long and winding road

The Governor of the Bank of England has issued another doom laden forecast warning that with one in 3 UK companies losing money” the road to economic recovery will be long and winding”.


He joins a growing band of Doomsayers made up of high profile members of the international Banking world and senior politicians who seem oblivious to the fact that the problems we now face were created on “their watch”.


It is the ultimate irony that politicians with the so called “light touch” and institutions such as the Bank of England/ US Fed were all too willing not to look too closely into the ways that the markets and sovereign economies were being structured for fear of rocking the boat.

There is a certain black humour that these very architects of disaster now turn round and pontificate about the dangers that the world faces.

As the crisis in the Euro zone unfolds it is also worth noting the number of high profile cheer leaders for the Euro who are now conspicuous by their silence on the matter.

The reality is the man in the street is told to prepare for more belt tightening whilst businesses find themselves desperate for funding as Banks are reluctant lenders as they look to repair their damaged balance sheets.

Plus ça change.

 

 

The value in leaving some deals for your competitors

  

In the coming weeks, much media focus will be given to the projected burst of retail sales in the pre Christmas/ post New Year period.

With tightening household budgets it should have come as no surprise to retailers that consumers will be hard to attract and some more innovative marketing in the last quarter of 2012 would have paid dividends. As it is Kamikaze discounting makes little commercial sense and the results of this policy is likely to be more casualties in the High Street in the coming weeks

All businesses operating in today’s climate need to have constant and rigorous focus to their commercial exposure.

Against the current competitive background it is very difficult to contemplate turning away business especially from a customer of long standing.

However, there are times when subsequent events show that on occasion the best business decision was to leave it to your competitors.

When stricter controls are in place over such elements as payment terms and credit limits the result is likely to be a reduction in turnover.

The upside of such fiscal discipline carries its own rewards. Avoiding defaults by customers is the surest way to protect the company’s bottom line at a time when profits are hard won and losses easy to establish.

 

 

Recessions catch what the Auditors miss

Recent events have underscored how vital it is that Senior Management set clear defined operational and reporting procedures.

In many companies the Directors simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run.

For example I have worked in trading environments where totally unrealistic profit targets have been passed from Board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets. The clutch of looses reported by the Banks in proprietary trading illustrates that this culture still exists today.

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading. In their desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is!

If your company is bucking the trend in these difficult times it may well be that you are implementing a winning formula.

However history tells us that it is a worthwhile exercise to look under a few stones – just in case.

 

 

Seemed like a good idea at the time

 

The current economic data point to the fact that the last weeks of 2012 are going to be a difficult time for all. As domestic budgets are ever more squeezed this will impact on businesses across the board.

The latest results from Supermarket chain Morrison, one of the UK's big four grocers, has reported another quarterly drop in sales, citing "fragile" consumer confidence.

The trading environment "has remained challenging", the supermarket said, and sales "were lower than anticipated".

This is an appropriate time to conduct a root and branch analysis of your business. Undoubtedly there are areas which would benefit from some radical adjustments/ change of direction. The consequence is not acting now could have very negative effects in the next few months.

Now is the opportunity to prepare for difficult times rather than adopting an ostrich "head in the sand" attitude.

When trying to explain a the outcome of a failed strategy to your Shareholders or Bankers it will be of little comfort to trot out the tired old defence “it seemed like a good idea at the time”.

 

Where's the money gone?

It is a constant source of amazement to me that so many companies be they large or small fails to keep a control of their inventories. Whilst Management consistently push for increased sales performance, the question of housekeeping is often put on the back burner or it would appear totally neglected.

The question of Stock is a thorny issue. There are obvious downsides in operating a “just in time policy” but at the same time excessive stock levels not only ties up valuable working capital but can become obsolete leading to substantial write downs. (There is also the danger of the “smoke and mirrors” approach to stock valuations which give false impressions as the company’s financial well being).

On the subject of receivables this is traditionally a time when the most inventive forms of delaying payments come to the fore. Even more so against the current backdrop it is the season to be vigilant.

This begs the question: how comfortable are you with your Stock and Debtors controls?

It might be timely to conduct a pre-emptive review of your operating systems now rather than wait for the post mortem results.