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A buck in the hand is worth two on the books [David Farber*]

28/06/2012

– 欢迎到我们在香港的新读者-

I am indebted to the consistently wonderful Financial Crimes (‘Alex Masterley’ is essential reading, in my view, and listed over -> there on the Blogroll) for this job ad:

Now, 8-10 Lakh Rupees (which is 8-10 x 105, or 80,000 – 100,000 in English) converts to an annual salary of £9,000-11,250, $14,000-17,500 or €11,280-14,100. Alex rightly headlines his post: Pay peanuts, get monkeys.

The Daily Telegraph reports that the last week of computer glitches at the Royal Bank of Scotland was, as we all probably suspected, down to one ‘inexperienced operative’. It has been claimed that he/she accidentally wiped information during what should have been a routine software upgrade.

The hapless techie, who was programming for the Royal Bank of Scotland, NatWest and Ulster Bank, is believed to have been based in Hyderabad, India. It is widely reported that at least some of the team responsible for the software upgrade were recruited in India following massive IT redundancies in the UK. You should look at Alex’s earlier post, Hester, Hester, Hester. Out, Out, Out, for his succinct Train A/Train B analogy for the group’s self-inflicted wound.

The cost of the cock-up, disregarding the share-price effect but including staff overtime and customer compensation, is already said to have reached £100m. It will unquestionably go higher when all the claims are logged. This being a blog which concerns itself with crucial textual accuracy, we should remind ourselves of a few other financial own-goals.

In 1998 a Salomon trader managed to sell $1.16bn of French government bonds inadvertently, by simply resting his elbow on his ‘live’ keyboard.

Morgan Stanley copped a $300,000 fine in 2004, kindly ‘awarded’ to them by the SEC, after a fat-fingered trader entered an order to buy $10.8bn of stocks. The client’s order had been for $10.8 million.

In December 2005 Mizuho Securities admitted that it was facing a $335m loss after an unnamed 24 year-old entered a trade wrong, and then ignored an error message that flashed across the screen. It didn’t stop there, though. It was all made faaaaaaaar worse as a simultaneous systems error at the Toyko Stock Exchange ensured that Mizuho couldn’t cancel the order when it was discovered.

In May 2001 someone at Lehman Brothers pressed the wrong button and sold a £300m portfolio of FTSE-100 company shares – 10 times more than intended. The (apparently) large block trade occurred just before the London market closed, and temporarily wiped £30bn off the value of the FTSE in a 200-point (3.5%) drop. Drop’s too mild a word; the index fell off a cliff! Lehman was subsequently fined a risible £20,000.

In December 2001 a UBS trader caused a book-loss of around $123m, when he attempted to sell 16 shares in the Japanese advertising firm Dentsu at ¥600,000 each. Instead he cleverly sold 610,000 shares at ¥6! Fortunately for UBS (and the trader), the firm was able to unwind most of the transactions.

Finally, there was a triumph by the late Bear Stearns. In October 2002, a ‘clerical error’ just before the Closing Bell saw the firm attempt to sell $4bn of stock instead of $4m! Fortunately, all but $622m of the sell orders were cancelled before execution.

Edit: Although it’s not a result of ‘fat finger’ syndrome, but ‘fat headed’ syndrome, we have today’s speculation that JPMorgan Chase’s disastrous play on credit derivatives is comfortably on-course for the wrong sort of record-breaking. In May the announced loss was $2bn, with Jamie Dimon admitting that unravelling it could eventually double the figure. There is informed comment today that, as JPMC unwind the exposure ahead of schedule, it could hit $8-9bn.

To be fair, JPMC weathered the last few years better than most and reported profits of $19bn last year, so a hit even of this magnitude is endurable. Nevertheless, as JPMC is the house that almost single-handedly invented CDS, CDO and the rest of the alphabet soup of complex derivatives in the 90s, this is even more than usually humiliating.

*David Farber, Professor of Computer Science at the University of Delaware, is a fecund generator of aphorisms.

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