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Dublin: 14 °C Monday 1 September, 2014

Column: Let’s stop pussyfooting around the Bloxham debacle

Former trader Nick Leeson is fed up with the light-touch reporting on the Bloxham demise – and with what he deems as inaction by the Central Bank and Financial Regulator.

Nick Leeson

I FIND MUCH of the reporting in this morning’s national newspapers about the demise of the Irish stockbroker, Bloxham’s, absolutely incredulous. In many, I feel they are almost trying to pass it off as expected; as yet another white collar mess that the perpetrators had hoped would go undetected and hope even more that it will go unpunished.

The line needs to be drawn, there needs to be accurate and insightful reporting of this episode and ultimately action needs to be taken.

Thankfully, no client monies are at risk at Bloxham’s as there have been in numerous other episodes but why this particular incident came to such a crux point and more importantly why it remained undiscovered for so long has to be exposed.

Let’s puts this in some context. The initial trades started in 2007; several months before the bank guarantees swung into action in September 2008. This was a course of action which in itself propelled the world’s credit crisis to the forefront of our every waking day. Let’s not forget that
this all happened in Ireland so every single bank, broker and financial institution should have had a long hard look at their systems and controls.

Auditors should have been hot to trot. If they weren’t then, questions should certainly have been asked again when, a few years later, UBS discovered a rogue trader of its own. Everything should have been whiter than white. I find it difficult to put into words how dumbstruck I am by this discovery.

It is yet another classic example of shooting yourself in the foot. With the rest of Europe looking on as the Irish nation goes to the polls to vote on the fiscal treaty, here we have another glaring episode of incompetence, negligence and downright stupidity adorning the business sections of the national newspapers. What makes it even more galling is that certain sectors of the media are trying to gloss over what has happened.

In one newspaper, the trade in question that resulted in several million euro worth of losses is described as legitimate. Granted, it may have been legitimate at inception but when the losses weren’t dealt with, when risk limits were breached… it very quickly skates towards a dodgy trade.

When somebody somewhere decided to conceal it from the auditors and the regulators by whatever method possible, it becomes false accounting and questions must be asked.

‘There is no room left under the carpet to sweep anything else under’

When it affected the capital adequacy of the organisation; it could be described as malicious.

Many may say that I have no room to talk but I’ve taken my medicine and accept full responsibility for the fraud at Barings. Each and every report I read this morning suggests more smoke and mirrors. Somebody, somewhere needs to understand that we are fed up with it and appropriate action needs to be taken. There is no room left under the carpet to sweep anything else under.

In one newspaper, the trades in question are described as ‘underlying’ trades. Clearly the reporter has never set foot inside a financial institution or for that matter checked a dictionary. The word ‘underlie’ is defined as to ‘be the foundation, cause or basis of’. Without getting too technical, I have no doubt what is meant by an ‘underlying’ trade.

We are informed that the losses were made through purchases in shares of AIB, CRH and a number of other shares, but to describe these purchases as an ‘underlying’ trade suggests that there were also trades at the time in a derivative of these shares. By purchasing the underlying equity you can become fully or partially hedged and risk averse. These derivative trades are normally fairly short in the length. At some stage, the dramatic moves in the equity market have far outpaced the possible profit in the derivative market.

At this point the trade should be unwound or it becomes an outright punt with no way of hedging the exposure. In this case the equity price has never recovered and significant losses ensued.

If this isn’t what happened, it was outright speculation from inception. Either way, it is another failure of compliance, risk management and corporate governance on a grand scale. I have no doubt that this whole sorry episode only came to light because of due diligence work that Davy’s was conducting in relation to the purchase of parts of the Bloxham business.

The exposure had nothing to do with the Central Bank or Financial Regulator, as far as I am concerned. I can only envisage them as characters from the Keystone Cops running from one crime scene to the next, never catching anyone and looking fairly stupid in the meantime. Nothing changes.

Everywhere you look at the moment there is a lamp-post with a poster suggesting ‘Investment’, ‘Stability’ or some other superficial themed slogan suggesting that things are looking up. There will not be either, or rather there can’t be either until you get your own house in order. It appears once again that we are a million miles away from doing that.

And if this becomes just another unpunished incident, would you invest here?

Read: Previous columns by Nick Leeson>

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