Operational Risk Management (ORM) Certificate Program

Barings

• £827
• 1995

• Unauthorized trading in derivatives by Nick Leeson in its Singapore subsidiary completely wiped out the bank’s capital of £200 million
• Failures: No segregation of duties. Internal audit report not heeded. Doubts raised by Singapore Futures Exchange (SIMEX) ignored. Excessive profits not investigated.

• $550MM
• 2004

• Use of derivatives for hedging becomes unauthorized speculation using leveraged derivatives, resulting in the collapse of the company (which imports nearly 100% of the jet fuel for China's civil aviation industry)
• Sub-standard risk pricing and risk management
• CEO Chen Juilin and other senior executives manipulate the company’s financial statements to conceal the losses

• Over $1.5B
• 1993

• Hedges adequately transferred the market risk created by their underlying commercial forward contracts, but MGRM exposed themselves to risk of not being able to fund margin calls if the value of the hedges fell.
• Company held enormous and out-sized positions in the markets, hence liquidity was insufficient to allow timely risk management

• $535MM
• 2004

• Four currency traders smoothed profits and concealed losses for over two years, and possibly five years. The traders entered fake transactions into their trading system. Various methods were used which exploited gaps in many controls: incorrectly recording genuine transactions, entering false transactions, and using incorrect revaluation rates. Exploitation of end-day timing gap between position marks and back-office controls. Use of internal transactions that received less scrutiny.
• While size of positions was partially masked, VaR limits were still breached continuously but did not trigger an investigation due to deemed lack of reliability of VaR calculation
• Warning signs raised in internal audit report did not reach senior management; concerns raised by counterparties not sufficiently investigated
• Desk supervision was inadequate to monitor trading vs approved strategies

• $288MM
• 1996

• Bank sued by four of its major clients, who asserted that Bankers Trust had misled them with respect to the riskiness and value of derivatives that they had purchased from the bank.
• Reputation damage greater than financial loss

• $1.7B
• 1994

• This prosperous California county filed for bankruptcy after losing $1.6B on leveraged derivatives transactions involving its major investment pool.
• Supervision of the County treasurer lacked financial sophistication and received inadequate reporting; Treasurer’s superior performance in prior years resulted in excessive trust.

• 2002

• Very rapid pace of acquisitions and poor integration of acquired companies.
• Optimistic interpretation of accounting rules, facilitated by lax external auditors. WorldCom eventually made a $9 billion adjustment for the period from 1999 thorough the first quarter of 2002.
• Potential conflicts of interest due to multiple relationships between different arms of large integrated banks (investment, trading, lending, private banking), WorldCom and WorldCom’s senior management.
• Conflicts of interest between equity analysts responsibilities to investors and power attracting investment banking business. (In December 2002, Jack Grubman of Citigroup was fined $15 million and banned from securities transactions for life by the Securities and Exchange Commission).

 TSB Bank

• 2018
• £48.65 million fine

• TSB Bank plc is a retail and commercial bank in the United Kingdom. It was founded in Birmingham, England in 1810 as the Trustee Savings Bank.
• A long-planned migration of customer records to a new banking system resulted in the loss of internet and mobile banking services for many customers for at least a week.
• Ultimately, TSB’s CEO had to stand down, and after a long and detailed investigation, in 2022 the bank was fined £48.65 million and in 2023 the then Chief Information Officer (CIO) was personally fined.

Fannie Mae/Freddie Mac

• Billions in US gov’t support
• 2008

• Fannie Mae and Freddie Mac placed under conservatorship by the Federal Housing Finance Agency (FHFA)
• Risk models did not reflect loosened underwriting standards of mortgage originators
• Political pressure to facilitate origination of loans to increasingly risky customers
• History of Fannie and Freddie resulted in confusion about implicit gov’t guarantee

• E 2B to E 37B (best estimate E 3.7B to E 8B)
• 2001

• Credit risk boundary event
• Bank created real estate funds, heavily concentrated in Berlin, with mispriced guaranteed returns to investors
• Complex private/government management structure created unusual incentives for senior management
• Regional political upheaval

• 2008

• The company’s biggest stumble “was a late entry into the subprime market as a way to juice the once fast‐growing company’s sluggish earnings,” The Wall Street Journal noted. Ill fated acquisitions in the sub-prime space exacerbated that move.
• In September 2008, regulators seized WaMu while the bank’s management team was on a commercial air flight.

• Over $20B
• 1998

• Liquidity squeeze of a major hedge-fund via margin calls on trading positions; pricing transparency was reduced in thin markets; market liquidity made worse because counterparties were reluctant to buy positions or securities fearing that LTCM would dump more on the market rapidly.
• Systemic risk if cross-defaults provisions were triggered; prompted Federal Reserve to broker an industry agreement to save LTCM through a $3.625B recapitalization
• LTCM models did not work if prices were discontinuous

• £13 billion infusion of taxpayer money
• 2008

• Britain's first bank run in 140 years
• Liquidity crisis caused by the mismatch between the bank’s reliance on short-term wholesale sources of funds and its uses of funds (which were only short-term as long as securitization markets were sufficiently liquid to allow asset sales).
• Having failed to find a commercial buyer, it was taken into public ownership in 2008, and was then bought by Virgin Money in 2012

Taisei

• $2.5B
• 2001

• Taisei was forced into bankruptcy, when all four planes that crashed during the 9/11 attack were insured by a reinsurance pool established by Taesei and two other major Japanese insurers.
• The pool was inadequately reinsured for catastrophic losses
• Taesei management did not understand pool management’s reinsurance practices or the resulting differences between accounting results and true economic risk results

Silicon Valley Bank (SVB)

• 2023

• Silicon Valley Bank (SVB) was a prominent financial institution that specialized in providing banking and financial services to start-up, technology, life sciences, healthcare, and venture capital firms. 
• In March 2023, after market concerns about its financial position, it collapsed and was seized by its regulator.
• Risk Managment Failures included its concentration in startups and high-growth companies, poor Asset Liability Management and not properly implementing its risk management framework.

 FTX

• 2023

• FTX was a popular virtual asset / cryptocurrency exchange and trading platform. 
• A November 2022 article noted that FTX's partner firm Alameda Research held a significant portion of its assets in FTX's native token (FTT) leading to concerns about the value of this cryptocurrency and thus the assets of FTX. 
• This was followed by a spike in customer withdrawals from FTX. FTX was unable to meet the demand for customer withdrawals. Following initial due diligence by a rival as part of a buyout, it was found that there were issues with customer assets. 
• On December 12, 2022, at the request of the US government, founder Sam Bankman-Fried was arrested by the Bahamian authorities for financial offenses.