Call It Conspiracy-- Lone Rogues Strike Again!

LONE ROGUES STRIKE AGAIN

In general, I enjoy conspiracy theories just as much as anyone else does, but there are also times when it's just as entertaining to pay attention to the anti-conspiracy theories, the official explanations that are meant to debunk alternative explanations for events and safely lay the conspiratorial speculations to rest.

A case in point is the "lone gunman" concept in the realm of political assassinations. By definition, an assassination that is solely the work of a lone gunman cannot be the result of a conspiracy, since a conspiracy requires the participation of more than one person. After the Warren Commission determined that a lone gunman had assassinated President John F. Kennedy, a precedent had been set that was followed faithfully in the official word on other assassinations and assassination attempts, from Martin Luther King, Jr. and Malcolm X to Bobby Kennedy, George Wallace, Gerald Ford and Ronald Reagan. The remarkable thing was that a "lone gunman" was somehow responsible every single time, and in every case anyone who questioned the "lone gunman" explanation was immediately labeled a "conspiracy theory nut."

My point here is not to jump into paranoid politics or to argue for or against "lone gunman" explanations; it's just to focus on the phenomenon and to observe how convenient that explanation became when current events failed to match conventional wisdom. That convenient "lone gunman" explanation for assassinations was not unlike the currently evolving scapegoat for financial catastrophes-the "rogue trader."

With the rogue trader scenario, a huge bank or other financial institution suddenly discovers that there has been a massive misappropriation of funds, a big drop in share value, or an unexpected meltdown of another sort. The institution in question also learns that the gigantic loss has been caused by a solitary individual who has hacked a computer, made unauthorized trades, falsified records, or manipulated key data in some sort of nefarious way. This "rogue trader" may or may not have personally benefited from the transactions, but typically the individual in question has been extraordinarily circumspect, and generally behaved in a way that led nobody suspecting that anything out of line was occurring.

The revelations about Jerome Kerviel at Societe Generale last week were, of course, just the latest in an extended series of "rogue trader" explanations for colossal financial failures. The first, and certainly the most famous, case was that of Nick Leeson, who at age 28 disappeared from the Singapore office of Barings Bank in February, 1995. After his $1.3 billion in trading losses brought down the 233-year-old institution, Leeson served three and half years in prison. While there he wrote a memoir, "Rogue Trader," which was made into a movie starring Ewan McGregor in 1999. He currently lives in Galway, Ireland, where he serves as General Manager of the Galway United football club and supplements his income with appearances on the lecture circuit.

Later in 1995 Tokyo-based Daiwa Bank was forced to shut down its U.S. branches after revealing $1.1 billion in losses incurred by trader Toshihide Iguchi, the firm's chief government bond trader in New York, over an 11-year period. Iguchi, who was born in Kobe, Japan, had majored in psychology at Southwest Missouri State University. After being convicted of fraud and falsifying documents, he served a four-year sentence in a Pennsylvania prison.

In 1996 the Japanese firm Sumitomo admitted to a $2.6 billion loss due to unauthorized trades by its chief copper trader, Yasuo Hamanaka, who was sentenced to eight years in prison and was released in 2005.

John Rusnak, a trader for Allied Irish Banks based in Baltimore, Maryland at the firm's Allfirst Financial Unit, managed to hide more than $691 million in losses over a period of five years before being discovered in 2002. Rusnak went to prison and Allied Irish Banks sold Allfirst to the M+T Bank Corporation in Buffalo, New York.

At the end of August, 2006, a 32-year old Canadian trader named Brian Hunter was up about $2 billion for the year in his trading of natural gas futures at the Amaranth Advisors Hedge Fund. But then he managed to lose about $5 billion in a single week, and by the time the dust had settled Amaranth had lost $6.4 billion and gone belly-up.

That's quite a history, and in every case a Rogue Trader was solely responsible. And so, when there's a revelation that a Rogue Trader has once again done his part to contribute to the current financial turmoil, our first impulse is to accept that notion without much question. The media focuses on the personality of the individual, and questions about his background, motivations, and methods abound.

Yet while there may not be a full-fledged cloak-and-dagger conspiracy at foot, I think that the "rogue trader" explanation has at least a little bit of slight-of-hand built into it. Like the notion of a lone gunman, it can potentially divert our attention from the really important matters that we should be considering. And even if a solitary individual can create billions of dollars in losses, there's a corrupt and crumbling system here that deserves much closer examination.

(FinancialCyclesWeekly newsletter January 27, 2008)