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In the meantime these elaborate risk control systems tend to snare peaceable, but ignorant, citizens as they go about their quotidian day, while the bad apples, wise to the ways of the world, have already worked out the flaws and work-arounds. | In the meantime these elaborate risk control systems tend to snare peaceable, but ignorant, citizens as they go about their quotidian day, while the bad apples, wise to the ways of the world, have already worked out the flaws and work-arounds. | ||
==How to spot a bad apple== | |||
The regrettable thing about bad apples is this: they have a habit of looking like boring functionaries, or even the good guys, right up to the moment that they don’t. | The regrettable thing about bad apples is this: they have a habit of looking like boring functionaries, or even the good guys, right up to the moment that they don’t. | ||
=== Good bad apples and bad bad apples === | |||
Before you know it’s a bad apple, a ''good'' bad apple doesn’t ''look'' like a bad apple. ''Bad'' bad apples ''look like'' bad apples, so they quickly get rooted out by good apples. Even a bad good apple can spot a bad bad apple. | Before you know it’s a bad apple, a ''good'' bad apple doesn’t ''look'' like a bad apple. ''Bad'' bad apples ''look like'' bad apples, so they quickly get rooted out by good apples. Even a bad good apple can spot a bad bad apple. | ||
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So it seems to us it won’t really do to say we must be better at spotting bad apples — thereby spreading by association the stigma of bad appledom on those mediocre apples who failed to spot them. ''Why'' did they not notice perfidy going on around them? Are they on commonly stupid, or or have their bad apple detectors somehow been disarmed? | So it seems to us it won’t really do to say we must be better at spotting bad apples — thereby spreading by association the stigma of bad appledom on those mediocre apples who failed to spot them. ''Why'' did they not notice perfidy going on around them? Are they on commonly stupid, or or have their bad apple detectors somehow been disarmed? | ||
Might they have been disarmed by ''process''? To test this hypothesis consider what happens to those within our formalistic system who ''do'' call out bad apples. People like Bethany MacLean, Harry Markopolos, Erin Arvedlund, Dan McCrum, and that junior credit officer at Credit Suisse who | Might they have been disarmed by ''process''? To test this hypothesis consider what happens to those within our formalistic system who ''do'' call out bad apples. People like [[Enron Corporation|Bethany MacLean]], [[Harry Markopolos]], [[Bernie Madoff|Erin Arvedlund]], [[WireCard|Dan McCrum]], and that junior credit officer at Credit Suisse who asked, of [[Archegos]], “why do we even have daily termination rights if the client is not amenable to us using those rights?” | ||
These people are regarded, before the fact, as bad apples. Not ''bad'' bad apples,<ref>Though Dan McCrum was subject to a criminal investigation, so he might feel differently about that.</ref> but ''impertinent'': irritants; turbulent priests the place would be better off without. Meanwhile the real bad apples carried on with their heroic poses — [[Bernie Madoff|NASDAQ chairmen]], [[Barings Bank|Bank chairmen]], [[Enron Corporation|visionary innovators]], [[Kweku Abodoli|star traders]]. They only started to look like bad apples ''after'' it. | These people are regarded, before the fact, as bad apples. Not ''bad'' bad apples,<ref>Though Dan McCrum was subject to a criminal investigation, so he might feel differently about that.</ref> but ''impertinent'': irritants; turbulent priests the place would be better off without. Meanwhile the real bad apples carried on with their heroic poses — [[Bernie Madoff|NASDAQ chairmen]], [[Barings Bank|Bank chairmen]], [[Enron Corporation|visionary innovators]], [[Kweku Abodoli|star traders]]. They only started to look like bad apples ''after'' it. | ||
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The [[JC]]’s view: the “bad apple” concept is not a good one if the virtue of one’s applehood is ''only'' ''apparent in hindsight''. | The [[JC]]’s view: the “bad apple” concept is not a good one if the virtue of one’s applehood is ''only'' ''apparent in hindsight''. | ||
== What to do == | |||
Now hindsight-coloured hand-wringing is all good sport, but what to do about it? Regular readers might not be surprised to hear the JC say that ''deprogramming the steampunk machine'' and asking people to use their experience, judgment and intuition might be part of it. ''Ask searching questions''. | Now hindsight-coloured hand-wringing is all good sport, but what to do about it? Regular readers might not be surprised to hear the JC say that ''deprogramming the steampunk machine'' and asking people to use their experience, judgment and intuition might be part of it. ''Ask searching questions''. | ||
Asking searching questions is not how modernist organisations like to work. | Asking searching questions is not how modernist organisations like to work. | ||
===Enter the [[opco|Opco]]=== | |||
{{opco scene setter}} | <div class="italic">{{quote| | ||
{{opco scene setter}}}} | |||
</div> | |||
In any case the Opco will methodically plough through each risk function’s slides, which will all tell the same story: in the main, plain sailing, but with the odd fixable glitch in process — the inevitable snags of modern financial services — and a remediation plan for how they will be resolved. All kinds of metrics will be presented, analysed, and set out in voluminous graphs, charts and data tables. There may be a dashboard of “high risk” situations, derived from these metrics, but its [[RAG]] array will read uniform green — perhaps studded with the odd amber, for the sake of plausibility — hazards in the form of easily-addressed talking points included “for good order” and with confident denials of elevated risk of loss. | |||
It will be like this because we are | It will be like this because we are enculturated to be always in control, for all systems to be go, all processes in good standing, all engines ticking over without significant strain. We tell ourselves that as long as this is so, we are safe. We have been acclimatised to believe that the greatest sin is ''to'' ''disrespect'' ''[[process]]''. | ||
But what good is a risk report designed to tell you everything is under control? What real-world function does this fulfil? | But what good is a risk report designed to tell you everything is under control? What real-world function does this fulfil? | ||
You ask, “did [[Malachite]] appear on any risk reports in the two years leading to its collapse? Did [[Archegos]]? Did [[Amaranth]]?” | You ask, “did [[Malachite]] appear on any risk reports in the two years leading up to its collapse? Did [[Archegos]]? Did [[Amaranth]]?” We ''hope'' the answer here is “no,” because ''that means there’s a bad apple''. if it were “yes,” and no-one intervened, then ''the system has broken down''. | ||
But these are rhetorical questions, and you | But these are rhetorical questions, and you don’t ask them lest ''you'' become the bad apple. | ||
=== The Opco reimagined === | |||
Imagine if the Opco’s standing agenda were instead to ask open questions, not designed for assurance that all is well, but to put up for discussion the things that might be not. | |||
''What is on your mind? What are you worrying most about? What should we worry most about? Describe your worst nightmare.'' | |||
Wouldn’t ''that'' be a more effective way of surfacing the bad apples? sometimes the most counterintuitive questions might provide food for thought. | |||
''Which client is printing the most business? Who is generating the most revenue? Who is borrowing the most money? Who is generating the most trading? What could possibly go wrong there?'' | |||
''Who diverges most from the pack? Whose performance seems too good to be true? Who has them most leverage? Who has the biggest positions? Which are the most concentrated names? Where is the thinnest liquidity? Whose docs, and margin lockups are the most severe?'' | |||
Have all risk control and business groups discuss these observations ''together''. Do it in person. No | Have all risk control and business groups discuss these observations ''together''. Do it in person. No [[Microsoft PowerPoint|deck]]<nowiki/>s, no BlackBerries, no-one phoning in. No interruptions. Put on lunch. No bullying. Open minds. Require everyone to engage. Everyone should contribute. Every one should know each others fundamental parameters. Everyone should be interested. | ||
=== And then he woke up and it was all a dream === | |||
There are several reasons this will never happen. They are as immutable, and predictable, as they are stupid. They boil down to various iterations of the [[The Ten Commandments of Cross Examination|golden rule of cross-examination]]: ''don’t ask questions to which you don’t know the answer''. | |||
==== Regulators would puke ==== | |||
We have to submit the minutes of our risk meetings to the regulator. They have great powers to demand further information from us. The last thing we want is to have them asking difficult questions. We wish to create the impression of calm, ordered, measured, ''control''. Nothing to see here folks, move along. We can’t afford to give any kind of impression there are things we do not know, things we cannot manage, or things about which we are worried in our business. Encouraging coal-face staff to indulge their paranoid fantasies is the last thing we should do. | |||
There is certainly sense in this, but it insane all the same. The best way of managing our regulator — a body whose existential purpose is to manage risk of catastophe — is to be wilfully blind to the risk of catastrophe. | |||
==== Senior management would puke ==== | |||
Even if the regulators would be cool with it — they wouldn’t — the of the Opco chair would not. | |||
“Imagine,” she might say, “if someone flagged this kind of crazy risk in a risk meeting, and we discussed it, and we decided to do nothing about it, and then that exact crazy risk happened. Management would be incandescent. We might get disciplined. Or fined. Or even fired.” | |||
{{sa}} | {{sa}} | ||
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*{{fieldguide}} | *{{fieldguide}} | ||
*[[Rumours of our demise are greatly exaggerated]] | *[[Rumours of our demise are greatly exaggerated]] | ||
{{Ref}}<references /> | |||