Why Character Matters

Citi trader loses bank $50 million. [The Rude Awakening] October 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Sean is at the Paradigm Shift Conference in Las Vegas, so here's a Rude from back in the day for you to enjoy. He'll be back live Friday with a report on the conference. Have a great day. --------------------------------------------------------------- Why Character Matters - Elizabeth Holmes was convicted of four counts of fraud. - Her deceit fuels criticism of entrepreneurship, capitalism, and medical science. - We must police our own. You have [(1) item]( on hold at our warehouse: Item #: [51987]( Status: On hold Value: Approx. $300 Claim by date: 10/06 at 11:59 PM To see how to claim yours simply [click here]( our Head of Customer Experience will show you what you need to do. [Click Here To Learn More]( [Sean Ring] SEAN RING I read with great interest in the Journal that Elizabeth Holmes was found guilty on four charges of fraud for her stunning duplicity in running Theranos. Each charge carries a 20-year prison sentence. While I’m pretty sure she won’t get 80 years, she’ll get some robust prison term… I hope. I won’t go into the case’s specifics too much, but I’ll instead use it as a basis for my arguments that character matters more than expertise in running a business. London, Autumn 2001 “Mate, my company’s shares are trading at $2. I think it’s a bargain.” “Dude, your company is about to declare bankruptcy. It’s over. Save your cash.” I remember that conversation like it was yesterday. The sequence of events that led up to it still makes me giggle. So here we go. When I moved to London in 1999, I immediately befriended a work colleague, AA. He was Australian, handsome, and loved pints of beer as much as I did. He had a beautiful wife and several beautiful girlfriends. But as I got promoted onto a trading desk, he was still stuck in operations. He was desperate to get out, as I was only 12 months before. As is the time-honored strategy to get on a trading desk, operations people sidle up as best they can. And sometimes, they overstep the mark. I was sitting on my desk one day, and the dealer board lit up. I picked up the phone. “Hey, mate.” “Hey.” I heard the swirling, gale-force wind that hits Canary Wharf in London, where our offices were. “Where are you?” “I’m outside. I just got sacked.” Later that afternoon, I found out AA had sent a “dubious” email to his trader buddy, and the guy reported him to Human Resources. I was indignant on his behalf, as I didn’t think - and still don’t - people should get fired for sending joke emails… even if there’s objectionable stuff in them. Call me old-fashioned. Anyway, the question was what his next steps were. AA didn’t have a finance degree or anything like that. He was just a smart, handsome Aussie dude. The kind of man British Human Resources professionals take a chance with. No idea why. (Wink, wink.) About a month later, he buzzed me on my old Nokia. “Matey, I’m so lucky. Things happen for a reason. I’m so glad I got sacked. I just landed the job of my dreams!” “Awesome. I’m so happy for you. That’s great. Who are you working for?” “Enron.” This was September 2001, I hasten to add. [Your Credit Card: Declined?]( Take a moment and picture this scenario: The line at the gas pump is getting longer as you insert your credit card for the second time. You decide to head in and ask the cashier what’s going on. There’s a long line inside. The woman in front of you looks frustrated. Everyone does. “There’s nothing I can do. You’re declined,” the cashier says to the man at the front of the line. It’s not just you. Everyone is declined. Something doesn’t seem right. A sinking feeling sets in as you realize something has gone terribly wrong. [Click here now for an urgent new prediction from a former advisor to the CIA and Pentagon.]( [Click Here To Learn More]( "We are the good guys. We are on the side of angels". Ah, Jeffrey Skilling. Remember that bastard? He was the CEO of Enron, formerly the seventh-largest company in the United States. What was scary about the Enron scandal was that the top 3 people running the company perpetrated the fraud. Chairman Kenneth Lay, CFO Andrew Fastow, and CEO Skilling were the guys who were found guilty. Lay had the good sense to die before he went to prison. But Skilling served 14 years in federal prison, and Fastow served six. Fastow cut a deal with the prosecutors. So impressed were they with his performance - that is, skewering his former colleagues - the prosecutors lobbied for a lower sentence. We still talk about that case in my graduate classes. Though the kids I teach were toddlers around the time the scandal broke, “Enron” has become a byword for fraud. And that’s exactly as it should be. Richard Mayberry gets this right in his Uncle Eric books. “Do all you have agreed to do, and do not encroach on other persons or their property.” This directive covers everything, really. Uphold contracts and don’t rob people. Of course, my friend AA didn’t benefit from working for people like that at his new company. He was looking for a new job a mere three months later. Heck, Enron used to stage their trading floor for CNBC interviews. That is, they’d pack it with people who weren’t traders just to make it look like a bank trading floor. Awful. And there was the issue of Skilling calling a fund manager an “asshole” for having the audacity to ask him where Enron’s balance sheet was. This is what Skilling said about it: The specific fellow that I was not real happy with is a short-seller in the market. I don't think it is fair to our shareholders to give someone a platform like that they are using for some personal vested interest related to their stock position. I get a little exasperated with that sort of thing, and I want people to know I am exasperated. When in reality, he resorted to namecalling to cover up his fraud. I was positively thrilled when Skilling and Fastow went to prison. This wasn’t a so-called “victimless crime.” Enron workers lost their houses betting on Enron stock because they thought Enron’s Big 3 guys were the be-all and end-all of business. Sure, you can call them “co-conspirators,” but did they really know what was going on? Heck, Arthur Andersen, Enron’s auditors, didn’t call them out. (Auditors’ incentives are another topic entirely.) Investors lost billions of dollars. Character and Trust Character is who you are, and reputation is what everyone thinks of you. Both are important, but character is controllable. It’s upgradable. As a father, I tell my son every day, to tell the truth. He’s at that stage where he tries to wiggle out of everything. Good character leads to trust. And trust is critical to free markets. [Lipton Matthews]( wrote a great article on this. Here’s a quote: Trust makes it easier to do business by lowering transaction costs. When entrepreneurs trust each other, they are likely to collaborate and reap the fruits of innovation. In a trusting environment, businesspeople form lucrative deals before signing a contract, knowing that both parties will comply with the agreement. For instance, Macauley (1963) argues that entrepreneurs rarely depend on legal enforcement to solve disputes and in many cases actually fail to create contracts stipulating conditions with customers. Trust greases the wheels of our economy. It genuinely makes the world a better place. Of course, there will always be the odd Enron scandal. That’s why it’s essential to prosecute these criminals as vigorously as possible. They genuinely stain the world we live in. And that’s why I’m thrilled Elizabeth Holmes got smacked in the mouth, legally speaking, of course. We can’t have this sort of behavior go unpunished. Luckily, Theranos wasn’t publicly traded, and most of the evaporated wealth was paper. But it could’ve been much worse. May she spend a good decade or so behind bars. Until tomorrow. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Turning Passions Into Interests [Sean Ring] SEAN RING Let’s get our cup of coffee and sit down. I’ll share my horror stories of fat fingering a trade as a broker with you. Every time I read about banks losing huge sums because one of their brokers did something they shouldn’t have, I mildly wince. I wince because I’ve made every mistake in the brokering book. But luckily for me, a decade and a half have passed since I was a broker, so the pain is mild. Before we begin, let me tell you why I’m writing about this today. Citi Trader Adds Extra Zero To Order; Loses $50 Million A Citi trader fat-fingered an extra zero onto a trade about a month ago. This sent the OMX Stockholm Index down over 100 points. From [Zero Hedge]( Fast forward to today when we find that said shitty math'ed fat-finger will cost Citi losses of at least $50 million, according to Bloomberg, while adding that the bank is still tallying losses from the mistaken trade and the final figure could balloon even higher. As we also reported before, the fat finger took place when a trader in the firm’s Delta One trading unit in London was working from home during a bank holiday on May 2 when the person incorrectly added an extra zero to a trade early in European market hours, sparking a furious five-minute selloff in the OMX Stockholm 30 Index which quickly spread across markets from Paris to Warsaw, wreaking havoc and wiping out 300 billion euros ($322 billion) at one point. [The rude] Credit: [Zero Hedge]( A few words from me on this. Luckily, I was only a futures broker, so it was next to impossible for me to lose that kind of cash accidentally. My most significant error cost $125,000, and I’ll never forget it. That amount is enough to get you in the boss’s doghouse, but not enough to get you fired. At least the first time. However, a $50 million mistake will get you fired immediately. I’m sure this broker didn’t mean to make this mistake. Adding an extra zero when typing in a trade is surprisingly easy. But clients trading this amount early in the morning, before the market is liquid, seems dumb to me. [Exposed: Biden’s 2022 mistake to cost him election?]( [James Altucher]( Will this ugly scandal doom Biden in 2024? In February 2022, [Joe Biden made the most dangerous mistake]( any President has made in the past 150 years. If it all plays out like Jim Rickards is predicting… Biden’s blunder will soon cost good Americans EVERYTHING. There’s still time to protect your money. But you can’t wait. [Click Here To Learn More]( Why You Don’t Trade With Low Liquidity, Unless You Want To Set Off An Avalanche I’ll never forget this one time when a hedge fund manager called me up. He said, “Sell 2,000 10-year futures at market.” A market order is when a client specifies only the trade volume, but not the price. Market orders incur “gap risk,” which means the markets can move far from the initial market price. This happens when the market is illiquid. As a broker with a fiduciary duty to my client, I said, “It’s 6:30 am London time, 1:30 am New York time. There’s no liquidity in the market right now.” “JUST SELL THE GODDAMN THINGS!” “Ok.” I sold 2,000 10-years and sank the market one whole point. (It’s an enormous move in that particular market.) As a young broker, I didn’t divine that this client wanted to tank the treasury market. This client intended to set off all the sell stops to shake the weak longs out of the market. It worked. You see it all the time in the gold market nowadays. But most of the time, big moves like this are an accident. What Operational Risk Is And Why You Can’t Get Rid Of It The Basel Committee on Banking Supervision defines [operational risk]( Operational risk is defined in the capital framework as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This definition includes legal risk but excludes strategic and reputational risk. The “people” part is the problem. And not just because people still input trades. People create processes. People build systems. And people can’t foresee the unforeseeable external events known as “black swans.” Now you may say, “Well, just be more careful!” Sure. Valid point. But things get dicey when a client is screaming down the phone to get his trade done. And sometimes, shit just happens. I’ll never forget when a trader blew up the German bond futures market. I was sitting at my trading desk with my feet up, as it was that quiet. The next thing I knew, my dealerboard lit up like a Christmas tree. At first, I thought it was a malfunction. But then I saw my biggest client’s button flashing. I picked up the phone. “What happened to the bunds?” They had fallen off a cliff. I had no idea why, but I said, “Institutional selling out of New York.” I always said that when I didn’t know precisely why something was happening. I stood up from my desk to see my colleagues also standing up with their hands in the air. No one knew what was going on. About two weeks later, we found out it wasn’t a fat finger. It was an errant tray. This trader was under a bit of stress. Allegedly, his wife was pregnant and imminently due to give birth. His dealerboard was flashing her phone number as he was coming back from lunch. He caught the blinking button as he came around the corner with his lunch tray. He put the tray down to pick up the phone. It was his wife, calling to say everything was ok. Except it wasn’t. This trader was looking at his screen, seeing the German bond market tanking. Since he was the German bond trader at his firm, he was puzzled. Until he realized he inadvertently set his lunch tray down on the “sell” button. Oops. He had sold nearly a quarter of a billion German bonds in a few microseconds. His bank was sympathetic and didn’t fire him. Ah, the good old days. Wrap Up The only reason why I don’t mind reading about other traders’ misfortunes is that I didn’t do it this time! But these are the kinds of problems banks have been trying to solve for a long time, without much success. “Measure twice, cut once” works for tailors because they don’t have their clients screaming down the phone at them, “WHERE’S MY GODDAMN SUIT!” It’s much different when dealing with hedge funds, asset managers, and other banks. In the meantime, bathe in your schadenfreude. The so-called Masters of the Universe screw up regularly, with enormous consequences. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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