Snake-bit by Software–DOA (706)

The headline award goes to the blog post linked here: How to lose 172K a second for 45 minutes. That’s nearly a half billion dollars of venom. The company was DOA in under an hour.  Cause of death: long dormant programming code deep within the high-speed electronic trading system rose up and sunk its fangs into the firm’s jugular.  How? In just one of eight servers, a systems upgrade produced a coding glitch that inadvertently activated the long-forgotten trading-bot, whose corresponding cross-checks and controls no longer existed.  So, on the day of it’s debut, 12% of the system started executing trades without being restrained by how many securities the firm actually had to trade or could buy.  Then staff, trying to isolate the problem, turned off other servers, which routed more and more electronic trade orders to the renegade server operating without limits.  A “normal” accident, as unstoppable as it was statistically predictable, in the ever more complex and super-velocity world of electronic trading.

What’s a Billion?

So JP Morgan Chase is ready to pony up just under a billion in fines to hopefully end regulatory action regarding trading losses of several additional billions that slipped under the radar earlier this year.  It makes sense that JPMC’s managers would like to get out from under.  The losses emanated in London, with New York top managers oblivious for a while which, in turn, kept the Board out of the loop, all of which tended to tarnish the bank’s reputation as a finely tuned enterprise steered by geniuses.

Shell Games III

Profiteering manipulations of the California energy market, a practice Enron pioneered, this time allegedly by JP Morgan Chase. Electricity traded around via “schemes” that picked the pocket of state authorities, according to the Federal Energy Regulatory Commission. So, yet again, fast-talking, sleight of hand, contractual labyrinths and doctored documents–cautionary emails allegedly morphed into endorsements–pass for productive economic activity, which very likely earned the masterminds kudos and bonuses at the time.  An empty-calorie economy!

Shell Game Redux

Yesterday LIBOR (see “Makers v. Fakers” below), today the Tribune Corporation.  Just how many high-priced accountants and attorneys did it take to craft an impregnable income tax shield for this teetering corporation–which went bankrupt anyway.  And in bankruptcy, how many more attorney/accountants did it take to wipe the corporation’s debt slate clean, largely at the expense of the “owner workers,” whose role from the get-go seemed more about exploiting tax loopholes than running the show? And finally, after the bankruptcy, how many more lawyers and CPAs did it take to come up with a sale structured to avoid and/or defer for years any taxes on the capital gains realized by the key investors who apparently did run the show? Shell games, indeed, though it looks as if the IRS is ready to pounce–but, of course, the attorneys and accountants stand ready to bill more high-priced hours fighting back.

 

Makers vs. Fakers?

So this fellow, and others like him, allegedly found ways to fudge the London Interbank Offered Rate, one of many widgets in the global financial system. LIBOR, however, acts as a base rate for such a multitude of financial products that its manipulation could inflate a bank’s profit at the expense of its lenders, as the bank passed on illusory “increased borrowing costs.”  Such illusions are enabled by the financial sector’s thick web of extremely complex financial instruments whose hidden, often unintended, levers await discovery and manipulation by ambitious functionaries looking to make a name, and a bonus, for themselves.  There was less room for this when we had our economy centered on making things.

A Billion Arrivederchi

So, as the world’s financial system teetered on the brink and with Bear Stearns about to drop like the canary in the coal mine, an august Italian bank ponies up $12 billion to buy a bank that changed hands for $8 billion just months before, a sweet 50% premium.   You’d think this is about Italian bankers except that Bank of America pretty much did the same thing with respect to Countrywide Finance at the same time. Without study of decision-making in the executive suite that is neither indictment nor testimonial,  such bad bets will be no less likely to occur in the future.  http://www.nytimes.com/2013/02/07/business/global/monte-dei-paschi-di-siena-admits-985-million-in-losses-from-secret-deals.html?smid=pl-share

March 7 Update: Bank Exec Leaps to Death; Then Covers Himself with Tarp; + Update 2