THE PROBLEM

Credit Suisse last week announced writedowns of $2.85bn(£1.4bn) as a result of ”mismarkings and pricing errors by a small number of traders” in its structured finance products. While it remains unclear whether misstatements at Credit Suisse were erroneous or deliberate, the news follows the exposure of lax controls at Société Générale, where managers failed to prevent Jérôme Kerviel running up enormous bets using the bank’s money. Will it ever be possible to construct a system of controls that can withstand a strong countervailing culture on the trading floor? Or are there fundamental psychological barriers to a foolproof risk management system?

THE ADVICE

THE EXECUTIVE
Tim Shepheard-Walwyn The control issues at SocGen and Credit Suisse are not isolated incidents. They just confirm that banking has still not come to grips with a bonus culture and a chase for short-term profits that is almost impossible for senior managers to resist. This is the core problem that lies behind the spectacular trading losses of recent months - just as it did 10 years ago during the Asian crisis. When huge bonuses and salaries are paid out, based on theoretical pricing formulas that all too often prove to be flawed, it is no surprise that clever people will find ways to fix the numbers in their favour. It is only when the bull market comes to an end that the underlying control weaknesses this encourages are exposed. The only way to tackle this is to link bankers’ pay to realised cashflow instead of notional accounting profits. But changing pay structures has proved almost an almost impossible nettle to grasp - just look at what happened when Warren Buffett tried to change the bonus structure at Salomon Bros in the 1990s. So don’t expect any dramatic changes soon.
The writer is former group risk director at Barclays Plc and a director of Lightfoot Solutions