This week I saw a story about how a college intern at Lehman Brothers in 2006 was trading a $150 million proprietary trading book for the firm. It was a revealing anecdote about the nature of risk management at the time from a recently released book by former Lehman prop trader Lawrence McDonald.
It reminded me of a something that happened a long time ago when I was working as a clerk for a small (no longer around) futures commission merchant (FCM) on the financial floor at the Chicago Board of Trade. My boss was heading on a business trip for a couple of days and asked the three clerks working on the desk to trade his personal account. Nothing huge just buying or selling a one lot at a key support or resistance level and closing it out for a small profit. It was fun and made the day more interesting. This was not high finance — we managed to earn 20 or 30 ticks for him on three or four round turns.
However, this is a big no no and when the boss upstairs noticed the activity — we are talking about three or four one-lot round turns during one day from a desk that would execute several thousand contracts of customer orders — the you know what hit the fan. Our boss was in big trouble and we were all nearly fired.
Going back to the Lehman anecdote, this proprietary bank gave a college intern control over $150 million. He didn’t even have a degree. At least all of us had a college degree and several years experience working on the floor. Not that it mattered, it was against the rules and even though there was never any more than a couple of hundred dollars at risk it exposed the firm to possible fines and disciplinary action.
The McDonald book is aptly titled A Colossal Failure of Common Sense.
Perhaps the most disturbing part about this is that you have to wonder how many of the executives who made these colossal errors in judgment not only were rewarded for their mistakes with huge bonuses but flush with TARP money are free to go on and make those mistakes all over again.