18.09.2011 Feature Article

The Reward For Risk – Is Kweku Adoboli A Patsy?

The Reward For Risk – Is Kweku Adoboli A Patsy?
18.09.2011 LISTEN

Following the issues of the past week, one story catches my eye. As always, I shall attempt to relate it to the wider issues of life. Hopefully, I can draw some lessons that could help avoid the repetition of such. I am very mindful of the fact that the case of Kweku Adoboli is in its infancy and as such, I shall exercise much care in what I write. There are consequences for throwing caution to the wind and I shall do well to avoid such. After all, although Kweku has been charged, he has not been proven guilty and we would do well to avoid hastily pre-empting the outcome until he has been given a fair trial, which we pray he will.

In reflecting on this case, I cannot help but to ask questions that most people would be reasonably expected to ask when an issue like this comes to the fore. One may believe that there are some who would adopt a firm stance on a subject like this even when they do not have the full facts. In various locations, this subject would be discussed at length, and prudence suggests that people avoid jumping to conclusions until judgment is passed. To presume that being charged with an offence implies guilt is a classic miscarriage of justice. When stories like these break, it is very easy for most people to jump unto the bandwagon and act as moralist, screaming and hurling insults at the accused without a critical analysis of the subject in question. That is almost akin to kicking a man when he is down and writhing in pain.

Before we attempt to crucify the accused, we need to consider if he truly acted alone and how the bank's internal controls and risk management procedures allowed a loss of such staggering proportions. Did he authorise every trade that he made by reason of self-regulation? Were there no audit trails or even trade records to be reviewed on a daily basis? Did the auditors not effectively carry out any compliance and substantive testing? Did the lure of the enormous bonuses awarded to the risk-takers in the market contribute in any way? Did the recent credit crisis not leave any positive footprints on the investment banking sector? Have we not learnt to institute the right controls after the case of Nick Leeson of the defunct Barrings Bank and that of Jerome Kerviel, the Societe General trader? The questions are uncountable and we wait with bated breath for answers to these and more. For now, it will serve us well to avoid speculation, the lynchpin on which the markets either thrive or fall on.

Some of the practices that go on in the City are not for the faint-hearted. The sophistication of strategies can only be termed as being abstruse to the wider public. In my previous article (Gambling – Addiction or Choice), I dealt extensively with the subject of gambling. What goes on in the City may be perceived as being a more acceptable form of gambling. How do you argue that activities like spread betting do not constitute gambling? Stripping the complex financial contracts of their cover, one may discover that at their very root is the notion of gambling, albeit in a much more sophisticated form or manner.

A further question that may be asked is how much profit Kweku may have made for the bank in the past under similar circumstances. For him to occupy the position he did suggests that he knew his onions. He must have been a bright chap by all standards. Had he began to assume an air of invincibility?

A contentious argument would be whether or not Kweku has been made a patsy i.e. the very idea that he is a person on whom the blame for something falls, in plain words, a scapegoat. The practice of taking risk for return is enshrined in the subject of finance and the correlation between the level of risk and the level of return has been taught in many a finance class. If this idea did not exist, it would be hard to see how investment bankers could be paid such salaries and bonuses that the average worker could only hallucinate about. Such practices now termed 'casino' banking have been going on for ages, and the very idea has become a cultural or institutional 'thing'.

The highly debatable performance-based reward systems, including the bonuses in place, also deserve a mention. One school believes that workers should be rewarded based on performance. Amongst other reasons, they argue that this is a form of motivation for an employee to exceed set targets. They further state that this should reduce shirking on the job. On the contrary, another school vigorously posits that a performance-related reward system should be done away with. To this group, remuneration packages are based on what employees are expected to do and therefore the need for further remuneration need not arise. In their view, such performance-related reward systems amount to a double reward structure. There are no right or wrong answers and both schools of thought have firm arguments to corroborate their position.

For the case in question, one group of people would adopt a sympathetic view to the unfolding events. On the contrary, another group will reject such a position. For the former group, the view may be that Adoboli is only a patsy who works in an environment where risk-taking is an accepted culture, albeit 'regulated'. They also view the performance-related system as contributing to this situation. The astronomical bonuses that one could make may almost be seen as being a form of temptation necessitating the incessant pushing of the boundaries. After all, the rich have not yet found a way to being satisfied with their wealth. More is certainly preferred to less. That said, some would argue against such a position, taking the view that if you take risk and succeed, the rewards accrue to you, therefore when things go wrong, you should bear the full brunt of the law. They note that people are inherently greedy, selfish and self-centred and would take risk to benefit them and when it goes awry attempt to court public sympathy.

Others debate this issue by reasoning that Kweku did not lose money because he was doing something wrong, rather that he was doing something wrong because he lost money. This suggests the idea of the end justifying the means. For some, the 'alleged' loss would have turned into a profit for others whose bank and shareholders will not care where that money came from.

To Kweku Adoboli's credit though, he came out and admitted what he had done, if the stories in the media are to be relied upon. We have been told that the bank's monitoring systems had not picked up the losses and also that he is helping police with the investigations, which should help with his case. However, there are repercussions for the case in question. It is hard to justify whether anyone going through the legal systems leaves better off and I am yet to find a court that has fully restored a person's reputation, no matter how hard they tried. Being tried both by the media and the court, it remains a miracle for one to emerge with his reputation intact.

One cannot help but to broaden the focus on an issue like this. What we fail to realise though, is that such issues may only be a wake-up call for us. It may be an opportunity for us to re-examine our own lives and see where we also need to make amends. From a broader perspective, such stories only serve to highlight the real state of our society. Today, we have become so materialistic and in search of so much pleasure, achievement and wealth that we end up grasping none. Many do anything they can to get what they want, a reflection of the pressure on people to keep up appearances. We have a need to be counted and appear to fit in. It is just a reflection of the society that we have created and live in.

Many times when one takes such risks and succeed, they are treated as a hero, yet when they fail, they become the villain. This is similar to these bankers, who, when they make huge profits are seen as clever and competent. Should they fail, they are perceived as irresponsible rogue traders. One would ask what the bank would have done with him if all those losses were profitable trades. Would they have called the police? Your guess is as good as mine. I doubt if you have heard that somebody was arrested for making profit. What is acceptable risk is debateable. The question that we are all faced with is where one needs to draw the line. This requires much thought from us as a society.

The sad thing about history though, is that it repeats itself. As to whether this would be the last or whether any changes would occur after this episode and whether Kweku Adoboli would be perceived as a real patsy or remains anybody's guess.

Dr. Frank Robert Silverson
Email: [email protected]