The Lehman Lesson UBS’s Rogue Trader Missed--- Make sure your losses are authorized.

[kpete]

Matt Stoller: Authorized Losses – The Lehman Lesson UBS’s Rogue Trader Missed
By Matt Stoller

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We found that Lehman was significantly and persistently in excess of its own risk limits. Lehman management decided to disregard the guidance provided by Lehman’s risk management systems. Rather than adjust business decisions to adapt to risk limit excesses, management decided to adjust the risk limits to adapt to business goals. We found that the SEC was aware of these excesses and simply acquiesced.

The SEC knew. So did Lehman management.

So an appropriate governance plan was in place to set risk limits. But management did not observe the limits. For example, Lehman committed to what was its largest single investment – Archstone – in May 2007, with closing to occur later. It was clear prior to the commitment that the Archstone transaction would put Lehman over its then existing risk limits, but the deal was committed anyway. With the inclusion of Archstone, Lehman was clearly in excess of its established risk limits. But in the face of exceeding its risk limits, Lehman did not take steps to reduce risk; rather, it simply raised the risk limits.

Losses were authorized.

Senior management made the conscious decisions to exceed risk limits and complete the Archstone and other deals because they believed, erroneously, that those deals would be profitable.

Well it was a decision. And they thought it would be fine. Losses were authorized.

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Losses were authorized.

MORE:
http://www.nakedcapitalism.com/2011/09/matt-stoller-authorized-losses-%E2%80%93-the-lehman-lesson-ubss-rogue-trader-missed.html