Risk Management and Leadership

Careers of Paresh Sukthankar and Nachiket Mor lend themselves to an interesting comparative study.

Both rose up the corporate ladder at a young age. Both are deemed experts in Risk Management. Both quit their positions in giant banks when they were about to be considered for elevation to the corner office.

Though we may never know why they made unexpected departure, we may engage ourselves in some guesses.  Were they given hints that they were not suitable for CEO position? Is relentless focus on risk mitigation a minus point for aspiring CEOs?

Perhaps more probably, their obsession with business risks made them develop cold feet when it was time to don the leadership mantle.

India's quality problems

It is not an exaggeration to say that there is an all-round deterioration in quality maintenance in India. Product quality is at a discount. Services quality is equally bad.

What else can explain Global NCAP (New Car Assessment Programmes) 's observation that Alto 800, i10, Nano and Figo have failed standard crash tests and pose serious risk to passengers if crash speed is above 64 km/hour? Ralph Nader would say American cars are unsure in any need and unsafe at any speed. Let him try cars produced in India also.

If driving is unsafe, flying is worse. US Federal Aviation Administration (FAA) which is keeping track of aviation standards in those countries whose airlines fly into the US has now determined that aviation safety standards in India are not in consonance with ICAO (International Civil Aviation Organisation) requirements. Therefore India has been relegated from category 1 to category 2. (There are only two categories.)

In the previous post, reference was made to quality standards in a pharmaceutical company. Tolerance threshold for Indians is unfortunately very high.

The three instances discussed here are individually ominous. Release of information about all these around the same time makes us even more scared.

What is ailing Ranbaxy?

USFDA has repeatedly taken Ranbaxy Laboratories to task for not maintaining specified quality in its manufacturing facilities. The facilities at Paonta Sahib, Dewas, Mohali and recently Toansa in Punjab have failed the test serially. This is very surprising because the US market is important for the company and therefore the management should have taken very strict steps to ensure quality once it came to be known that USFDA was looking askance at it.

So what went wrong? One explanation is that there are disgruntled employees who are deliberately creating quality problems and then informing USFDA. Who could they be? The Boston Consulting Group is advising the company on productivity improvement. One of the obvious recommendations is letting go of some employees. Are the exiting employees creating trouble? If this is possible, BCG must have warned the management in time. If it has not, it means the consultant is also facing quality problems.

Daiichi Sankyo group of Japan bought the company from its original promoters. The Japanese group has accused the promoters of not divulging all relevant information while selling their stake. While the truth in this accusation remains to be tested, is it possible that the employees supporting the original promoters are playing games?

Limits of Exchange Traded Product

Every student of Finance and Economics is repeatedly told that credit risk or counterparty risk is much less when we deal in exchange traded products rather than over the counter contracts. Though theoretically true, this proposition assumes that the exchange is properly regulated.

The ongoing fiasco at National Spot Exchange Limited is an eye-opener for regulators. It conveys a strong message that exchanges do not mitigate credit risk unless its operations are transparent and efficient. It is hoped that SEBI will conduct a detailed enquiry and publicise the learning points. This is not the time for a turf war between SEBI and FMC. The guilty must be exemplarily punished because otherwise other exchanges also will become slack.

Cliff effect of a possible downgrade of India's credit

In the month of June, 2012 global rating agency Standard and Poor's (S&P) threatened to downgrade India's sovereign credit rating to ‘speculative' from the lowest notch of ‘investment' grade. The report containing the threat was sensationally titled ‘Will India be the first BRIC fallen angel ?' Predictably, this warning was a red rag to bullish ministers in Indian government and they characterised the report as whimsical, tendentious and mischievous. It was argued that Indian economy was the second fastest growing among large countries (next only to China) and that India was capable of springing pleasant surprises.


Earlier in April, 2012, Standard & Poor's scaled down India's credit rating outlook from ‘stable' to ‘negative' with a warning of a downgrade if there is no improvement in the fiscal situation and political climate.

This chronology of events shows that deterioration in the state of Indian economy as reflected in economic data released during the April – June quarter was quite palpable. If India’s rating is downgraded (from the present BBB-) to BB+ or any rating below (also known as ‘junk’ rating), the economic consequences will be horrendous.

Many otherwise knowledgeable people criticize rating agencies for rating countries like Spain and Italy which are reeling under severe economic pain, higher than India. The reason for this apparent paradox is the disparity in their per-capita incomes. Whereas Spain and Italy have per-capita annual incomes of $ 31,550 and $ 31,090 respectively, India’s is only $ 3,560 according to World Bank’s assessment for the year 2010 under ‘Purchasing Power Parity’ principle. India is ranked 153 out of 215 nations. It is logical to assume that an economy with higher per-capita income can withstand economic shocks better. Spain is rated BBB+ and so is Italy.

If we look at the methodology adopted by S & P to award sovereign ratings, we will realize how shockingly imminent our downgrade is. S & P factors in political, economic, external, fiscal and monetary profiles of the country. Crucial determinants for political score are dynamics of policymaking and transparency of institutions. Who can deny that these are our Achilles’ heel now? It is interesting to note that when S & P downgraded USA from AAA to AA+ in August, 2011, it presented the following reason:

“the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

Economic score is determined, inter alia, by assessing income levels, growth prospects and volatility. India’s performance is poor on income levels; volatility is unfavourably high on account of continued dependence on monsoon and uncertain availability of infrastructural facilities like power.

Status of currency and external indebtedness are taken into consideration for external score whereas sustainability of fiscal deficit determines fiscal score. India’s fiscal position continues to deteriorate on account of government’s inability to optimize management of subsidies owing to political compulsions. Monetary score varies with credible monetary measures to tackle inflation. So whichever way you look, the chances for a downgrade in our rating are uncomfortably high.

Why Cliff Effect? : In economics, if the effect of an action is disproportionately high either positively or negatively, the effect is christened as “cliff effect”. If India is downgraded from BBB- to BB+, the consequential adverse impact will be immense. Though downgrade by a notch is normally not a significant development, fall from investment grade to speculative grade is considered as calamitously precipitous (and hence the cliff effect).

Many international investors detest funding speculative investments. Even those who are ready to lend will charge higher rates of interest. Generally, corporates will not get a better rating than the country’s sovereign rating. Therefore, even major Indian banks will face higher interest burden for funds sourced abroad. For instance, as on 31st March, 2012, SBI had deposits worth Rs.61,433 crore in its foreign branches and borrowings outside India equivalent to Rs.78,127 crore. SBI had also raised capital funds abroad in the form of innovative perpetual debt instruments equivalent to Rs.3,179 crore. Interest rates on these funds raised abroad will go up if India’s rating is junked. ICICI Bank’s deposits in foreign branches on 31st March, 2012 was equivalent to Rs.13,128 crore and borrowings outside India Rs.84,509 crore. Indian banks and other corporate will face two consequences: 1)Raising funds abroad will become more difficult and 2)whatever funds are available will attract higher interest costs.

Sharp differences in credit qualities of investment-grade and speculative-grade sovereigns are brought out by the following observation of S & P: “An average of 1% of investment-grade sovereigns have defaulted on their foreign-currency debt within 15 years, compared with 30% of those in the speculative-grade category. All sovereigns that have defaulted since 1975 had speculative-grade ratings at least one year before default.” These facts are chilling and one hopes that Government of India will do all it can to stave off a ratings downgrade instead of shooting the messenger (rating agency) when it is too late.

Fareed Zakaria's wilful blindness

Fareed Zakaria has joined the select band of eminently successful people whose feet of clay are ultimately exposed. Why does such a talented writer (a graduate from Harvard and Yale!) resort to plagiarism? Is this tendency an as yet unexplored aspect of what is popularly called as "Winner's curse"? Does the so-called "Progress trap" contribute to this ugly phenomenon? Is it possible that "Icarus paradox" inevitably takes its toll?

It is strange that persons and organisations which have gained glory in their respective fields do not desist from taking extreme risks that will eventually undo them. Rajat Gupta, Standard Chartered Bank and Fareed Zakaria are the names readily coming to our mind .

Rajat Gupta had everything to lose when he got close to Raj Rajaratnam. StanChart was probably aware that it was risking its reputation built over decades when it apparently misused the " U-turn" transactions at its NewYork branch. Fareed Zakaria could not have been blind to the possible consequences of plagiarism and to the certainty of being found out especially when he was copying a widely-read Yale professor.

These examples are most likely to figure in the next edition of Margaret Heffernan's best seller titled "Wilful Blindness".

Updated on 20th August: Time magazine suspended Fareed Zakaria briefly and reinstated him with unexplained haste. Given his "stature" in the world of opinions, it is possible that the magazine was afraid of losing him in case suspension lasted longer. Is he a person too big to employ?

Further update on 2nd Sept.: It is surprising that magazines like Time and Economist have chosen not to mention this unsavoury episode in their issues. It appears that unattributed copying was done by a ghost-writer for Fareed Zakaria. We cannot expect FZ to admit that he employs ghost-writers.

More on J P Morgan Chase

Governance Metrics International (GMI) rates companies worldwide in two ways. One rating is called ESG Rating covering environmental, social and governance issues. The other rating is AGR Rating incorporating accounting and governance risks. GMI has rated J P Morgan Chase under 'F' for ESG Rating and 'Very Aggressive' for AGR Rating. GMI rates 4200 companies under ESG Rating and more than 18000 companies under AGR Rating.

The percentile scores are as under:

ESG Rating                                     Percentile Score

A (Superior)                                         96 - 100

B (Above Average)                            76 - 95

C (Average)                                         26 - 75

D (Below Average)                              6 - 25

F (Failing)                                              1 - 5


AGR Rating                                 Percentile Score

Conservative                                       86 - 100

Average                                               36 - 85

Aggressive                                         11 - 35

Very Aggressive                                  1 - 10

Evidently, GMI has had a creditable understanding of JP Morgan Chase especially when rest of the world was awe-struck and dumb-founded by JPM's "brilliance".

Disappointment at Shareholders' Meeting

The annual meeting of shareholders of J.P.Morgan Chase was held within a week of Chairman cum CEO's admission of massive failure of Risk Management system. One therefore thought that the shareholders would hold the CEO accountable for this incredible lapse. But the meeting was a damp squib. The meeting was almost a breeze for Jamie Dimon! What is governance coming to ?

The shareholders also voted on a proposal to split the post of Chairman cum CEO. Sadly, even this proposal failed to muster majority support. If shareholders are suicidal, who can save them? They let arrogant CEOs last longer.

Will the Japanese quake throw up another Nick Leeson ?

Nicholas (Nick) Leeson was a derivatives trader in the Singapore branch of Barings Bank. After earning enormous profits for his bank (mainly through unauthorised trades), he found to his dismay that his luck was running out and that his trades (unauthorised, as usual) were becoming excessively out of the money and incurring huge losses for the bank. He did his best to hide the losses and started taking positions with the view that Japanese stocks would move up in value.

Misfortunes don't come singly. A huge earthquake struck Kobe, Japan on 17th January, 1995. The equity market in Japan crashed and Nick Leeson's attempts to recoup losses collapsed. Nick Leeson, the rogue trader, was caught napping and his notoriety became legendary. The Kobe earthquake was the turning point that caused Barings' extinction.

The present crisis in Japan is a double whammy. The Sendai disaster is a deadly combination of massive earthquake (8.9 on the Richter) and tricky tsunami. Damage to men and materials is horrendous. Has any rogue trader somewhere in the flat world taken a position that might prove fatal to some well-known financial institution ? One hopes not. But derivatives, or more particularly derivative traders, are so devious that it is impossible to rule out any unpleasant surprise.

Misuse of Freedom?

A pastor's threat to burn a copy of Koran kept the entire world on edge for the past three days. True, the American laws on individual's liberty do not permit the government from embargoing such acts of lunacy. Luckily better sense seems to have prevailed on the pastor and it is now unlikely that he will go ahead with his threat.

In the meanwhile, a comparable ominous development is taking place in Germany. A director of Bundesbank, the German central bank, Thilo Sarrazin has recently written a book titled "Germany does away with itself: How we are gamblng away our country". The author accuses the immigrants of not integrating with the host country. Sarrazin, ironically in charge of risk control in the Bank, has made provocative observations about different religions in his book. His views were generally well received by the German public though the sharpness of comments was criticised. Deeming the book as politically incorrect and reminiscent of Hitler's Mein Kampf, the Bundesbank sacked the writer from its Board. The question that now arises is who is more intolerant, the person who voices deviant/inflammatory views or the organisation that punishes an employee for his incendiary comments made in his personal capacity?

Crises galore

Thomas Friedman advises us that in the midst of all the potential crises, there is still some scope for sensible action on our part that will ensure sustainable progress for mankind. We need to act before it is too late, apprehensive that there are just too many trouble-spots and groups which can go bonkers anytime. Here is Friedman in his own words: (Courtesy: The NewYork Times)

June 11, 2010


This Time Is Different  By THOMAS L. FRIEDMAN

My friend, Mark Mykleby, who works in the Pentagon, shared with me this personal letter to the editor he got published last week in his hometown paper, The Beaufort Gazette in South Carolina. It is the best reaction I’ve seen to the BP oil spill — and also the best advice to President Obama on exactly whom to kick you know where.

“I’d like to join in on the blame game that has come to define our national approach to the ongoing environmental disaster in the Gulf of Mexico. This isn’t BP’s or Transocean’s fault. It’s not the government’s fault. It’s my fault. I’m the one to blame and I’m sorry. It’s my fault because I haven’t digested the world’s in-your-face hints that maybe I ought to think about the future and change the unsustainable way I live my life. If the geopolitical, economic, and technological shifts of the 1990s didn’t do it; if the terrorist attacks of Sept. 11 didn’t do it; if the current economic crisis didn’t do it; perhaps this oil spill will be the catalyst for me, as a citizen, to wean myself off of my petroleum-based lifestyle. ‘Citizen’ is the key word. It’s what we do as individuals that count. For those on the left, government regulation will not solve this problem. Government’s role should be to create an environment of opportunity that taps into the innovation and entrepreneurialism that define us as Americans. For those on the right, if you want less government and taxes, then decide what you’ll give up and what you’ll contribute. Here’s the bottom line: If we want to end our oil addiction, we, as citizens, need to pony up: bike to work, plant a garden, do something. So again, the oil spill is my fault. I’m sorry. I haven’t done my part. Now I have to convince my wife to give up her S.U.V. Mark Mykleby.”
I think Mykleby’s letter gets at something very important: We cannot fix what ails America unless we look honestly at our own roles in creating our own problems. We — both parties — created an awful set of incentives that encouraged our best students to go to Wall Street to create crazy financial instruments instead of to Silicon Valley to create new products that improve people’s lives. We — both parties — created massive tax incentives and cheap money to make home mortgages available to people who really didn’t have the means to sustain them. And we — both parties — sent BP out in the gulf to get us as much oil as possible at the cheapest price. (Of course, we expected them to take care, but when you’re drilling for oil beneath 5,000 feet of water, stuff happens.)

As Pogo would say, we have met the enemy and he is us.

But that means we’re also the solution — if we’re serious. Look, we managed to survive 9/11 without letting it destroy our open society or rule of law. We managed to survive the Wall Street crash without letting it destroy our economy. Hopefully, we will survive the BP oil spill without it destroying our coastal ecosystems. But we dare not press our luck.

We have to use this window of opportunity to insulate ourselves as much as possible against all the bad things we cannot control and get serious about fixing the problems that we can control. We need to make our whole country more sustainable. So let’s pass an energy-climate bill that really reduces our dependence on Middle East oil. Let’s pass a financial regulatory reform bill that really reduces the odds of another banking crisis. Let’s get our fiscal house in order, as the economy recovers. And let’s pass an immigration bill that will enable us to attract the world’s top talent and remain the world’s leader in innovation.

We need all the cushions we can get right now, because we are living in a world of cascading and intertwined threats that have the potential to turn our country upside down at any moment. We do not know when the next Times Square bomber might get lucky. We don’t know how long the U.S. and Israel will tolerate Iran’s nuclear program. We don’t know if Pakistan will hold together and what might happen to its nukes. We don’t know when North Korea will go nuts. We don’t know if the European Union can keep financing the debts of Greece, Hungary and Spain — and what financial contagion might be set off if it can’t.

“It is not your imagination,” says corporate strategy consultant Peter Schwartz — there is a lot more scary stuff hanging over the world today. Since the end of the cold war and the rise of the Internet, we’ve lost the walls and the superpowers that together kept the world’s problems more contained. Today, smaller and smaller units can wreak larger and larger havoc — and whatever havoc is wreaked now gets spread faster and farther than ever before.

That is why we have to solve the big problems in our control, not postpone them or pretend that more lobby-driven, lowest-common-denominator solutions are still satisfactory. A crisis is a terrible thing to waste, but a reprieve and a breathing spell — which is what we’re having right now — is a really terrible thing to waste. We don’t want to look back on this moment and say: How could we have gone back to business as usual and petty political gridlocks with all those black swans circling around us? Then we will really kick ourselves.

The runway tragedy at Mangalore

The Dubai-Mangalore Boeing 737-800 flight crashlanded in the Mangalore airport on 22nd May resulting in the tragic death of 158 persons. This airport has a tabletop runway and is referred to as a tricky airport by the NewYork Times.

In aviation terminology, this event is called "Runway excursion". Runway excursion is an incident involving only a single aircraft where it makes an inappropriate exit from the runway. This can happen because of pilot error, poor weather, emergency, or a fault with the aircraft. According to statistics compiled by IATA, there are 1.6 runway excursions per million flights in AsiaPacific region. (This compares with 0.36 in North America and 3.85 in Africa.) Nearly one in four air crashes occurs during landing.

Black Box and Voice Recorder are yet to be retrieved. Therefore views on what could have led to the crash continue to be conjectural. But one thing is certain. Aviation authorities need to pay more attention to safety of passengers.

ICICI Bank's Risk Appetite

Everyone knows that ICICI Bank's appetite for business volume and therefore for risk is humongous. So nobody is surprised that ICICI Bank is keen to take over Bank of Rajasthan (BoR) with the latter's warts and all. BoR is any regulator's nightmare.The quality of its credit portfolio is suspect and its reputation is in tatters. How come ICICI Bank is interested?

BoR has 463 branches, most of them in Rajasthan where ICICI Bank wants to strengthen its footprint. For a bank that has only recently opened its 2.000th branch, acquiring 463 branches at one go is apparently attractive. But agreeing to pay nearly Rs.6.7 crore per branch and 4.8 times BoR's Book Value even before due diligence is completed is indicative more of desperation for business than of eagerness for profits. Topline growth does not guarantee growth in bottomline and in fact is likely to increase the pressure on profitability.

ICICI Bank had earlier taken over Bank of Madura Ltd and Sangli Bank. Therefore ICICI Bank must have the expertise to manage the transition without hassles. It can easily optimise the utility of nearly 4,500 employees of BoR. However it should be conscious that it is walking into a regulatory quagmire.

Air India's intriguing transparency

It is customary for companies to be discreet about selection of new CXOs and not to announce names of contenders / applicants till the final choice is effected. One is surprised therefore that Air India sources have gleefully announced that the new COO will be one of the three shortlisted who have been named. They are presently with Austrian Airlines, Air Malta and Rapidair.

Will this not needlessly create friction in the relationship of these applicants with their present employers ? This apart, is it likely that there is no one within the country who can do a better job ? Air India is not just a business organisation. It is also caught in a political cobweb and hence someone more appreciative of India's political nuances would be a better choice. But then, serial bungling is Air India's forte !

Lehman Brothers -- the Indian connection

Repo 105 detailed in an earlier post may be regarded as the acme of financial skulduggery at Lehman Brothers. But it is not the only malpractice adopted by the bankrupt firm. Though LB acted as a cohesive group in misleading the financial world, there was one conscientious employee  who was predictably sacked after he wrote a confidential letter to top management expressing his discomfort about the firm's presentation of financial statements.

The honest deviant is one Mr.Matthew Lee who wrote to the top management on May 16 2008. In this letter which is likely to be profusely quoted in different platforms in the near future, he describes his official position as "Senior Vice President in charge of the firm's consolidated and unconsolidated Balance Sheets of over one thousand legal entities worldwide". What is interesting is that of all these 1.000 + legal entities (one may note with disdain that the entities were legal, only their accounting processes perhaps were not), he singles out the Mumbai office for an unflattering comment.

Para 5 in the brief letter says, "Based upon my experience and the years I have worked for the Firm, I do not believe there is sufficient knowledgable management in place in the Mumbai, India Finance functions and department. There is a very real possibility of a potential misstatement of material facts being efficiently distributed by that office". (Efficient distribution of a misstatement , how prophetically sarcastic ! )

Speaking of the entire firm, Lee observes "certain senior level internal audit personnel do not have the professional expertise to properly exercise the audit functions they are entrusted to manage".

Is there any reason to trust that other equally "reputable" firms are managed better ?

Lehman Brothers : Examiner's report

Anton Valukas, Chairman of the law firm Jenner & Block is the examiner in the bankruptcy proceedings of Lehman Brothers Holdings Inc. He has now submitted his voluminous report in nine volumes containing in all 2,200 interesting pages. It is already getting described as "as absorbing as any bestseller".

The report finds Ernst and Young accountable for professional malpractice and negligence. Lehman Brothers, according to the report, has reasons to proceed against Lehman's erstwhile CEO Dick Fuld and three of its CFOs for breach of fiduciary duties.

In defense of Mr.Fuld, his lawyer has stated that throughout his career, he faithfully and diligently worked in the interests of Lehman and its stakeholders.

Mr.Lowitt, one of the CFOs indicted in the report, has, in the words of his lawyer "in the three months during which he held the job, worked diligently and faithfully to discharge all of his duties as Lehman's CFO."

Apparently there is no common understanding of "faithfulness" and "diligence" between the examiner and Lehman executives !

Another former  CFO, Ms.Erin Callan who is also an indictee has said in a different context, "I do not trust that any journalist ever truly captures the essence of the person or their story, and it is all filtered through someone else's lens." She adds philosophically, "Somehow everything that happened had its purpose and its reason. I try not to read anything about myself, and I have taken myself out of the environment that provided a constant reminder. I have changed my life in a very significant way, which I hope will be more fulfilling and worthwhile. It is difficult to have created such a hard line. But it is the way that, I have learned, is critical to moving forward." Words we don't expect from a corporate high-flier. Incidentally, Callan became Lehman's CFO at the age of 41 and had to be eased out in March 2008, six months before the firm imploded. She joined Credit Suisse and then left CS also and is now incommunicado.

The examiner's report brings out the risk management skills of Warren Buffett very clearly. When Dick Fuld approached him to invest in Lehman Brothers in early 2008, Buffett declined because 1) Lehman executives themselves were not interested in making investments in their firm, 2) Fuld was blaming short-sellers for his firm's distress and 3) Fuld was not transparent about a dud investment in Japan. Warren Buffett's risk-attuned antennae were sharp enough to sense even weak signals. The report is destined to be the subject of animated discussions in corporate corridors for some time to come.

The report points out that the firm was using an Enronesque accounting shenanigan nicknamed "Repo 105" to temporarily offload illiquid investments . This sleight of hand enabled Lehman to window-dress its Balance Sheet by showing reduced borrowings and therefore lowered leverage. This financial engineering resulted in 'disappearance' of investments and debts to the extent of $50 billion. The firm's equity in early 2008 was only around $25 billion and total asset size was $700 billion. By all accounts, the accounting gimmick was material and to a normal mind criminal also. But the report falls short of attributing mens rea.

Panic over Credit Default Swaps

Credit Default Swaps (CDS) are perhaps the simplest of derivatives. Therefore, it is surprising that the Presidents of European Commission and France, German Chancellor and Greek Prime Minister are worried over the impact of CDS market on sovereign standing of Greece and consequently the fate of Euro. Increased activity in the CDS market preceded the current Greek financial crisis. Hence the leaders have simplistically assumed that the CDS market is the culprit. Post hoc, ergo  propter hoc ! (After this, therefore on account of this !)

This outcry against the CDS has led to a call for ban on this derivative instrument. Volumes in the market prove that CDS is used as a speculative instrument by many players. What started as a hedging tool degenerated into a speculative weapon because of lack of regulation. The remedy therefore is to strengthen the regulatory framework. Throwing the baby with the bathwater betrays lack of maturity.

Limits to managerial control

Man's ingenuity to circumvent rules and regulations is unlimited. Correspondingly, managerial control exercised in corporates is quite limited. This truth is brought out frequently by what is disclosed by companies. There are ofcourse many more instances of failure of control which are not brought to light.

Wipro, the third largest software exporter in India, has now admitted that an employee has been embezzling the company's funds for the last three years by misusing / stealing others' passwords. (The employee whose name is not disclosed has since committed suicide.) Loss to the company is around Rs.20 crore. (I wonder why the company refers to the loss in terms of dollars only : $4 million. The fraudster was working in company's headquarters in a department called "Controllership" ! Good control !) The company claims it has recovered nearly half the defalcated amount as if recovery attenuates the seriousness of control failure.


Wipro is not an isolated example. We know what happened to Barings courtesy a rogue trader called Nick Leeson way back in 1995. More recently, in January 2008, the French bank , Societe Generale, was put to immense loss by another rogue trader named Jerome Kerviel. The irony here was that this bank is supposed to be very strong in risk management practices. There are countless examples of employee frauds, minor and major, in Indian banks as well.


We will be scared to death if we realise the potential for frauds in our banks. It is not rare to find officers in a typical Indian bank sharing details of their password with their colleagues in order not to inconvenience customer transactions when they are momentarily away from the branch for whatever reason. Most employees are oblivious of possible disastrous consequences of this (mal)practice.



Not infrequently, we come across instances where safety locker lessees in banks complain of loss of articles from the lockers. There have been cases of dishonest employees keeping duplicates of customer keys. Again, the control system is not foolproof. Given the massive potential for such mishaps, it is indeed surprising that frauds are not more common.

"PIGS" to keep recovery at 'bay' ?

PIGS is a pejorative acronym for the countries which are likely to pose the next round of challenges in the ongoing economic crisis. PIGS stands for Portugal, Ireland, Greece and Spain. Of these economies, Greece is already a full blown threat. This country has the dubious distinction of restating its accounts a la corporates. In October 2009, a new government was elected. Upon investigations, the new government found out that its predecessor had indulged in Enron-style accounting sleight of hand to grossly understate deficit figures. Consequently, deficits for 2008 and 2009 were restated from 5% and 3.7% of GDP to 7.7% and 12.7% respectively. It is now feared that Greece is likely to default on sovereign bonds. Sovereign default is the ultimate disaster for risk managers.

Any such default will have contagion effect. In addition, market sentiments will turn more bearish. Its ripple effects will postpone return to economic recovery by a few months.

Compulsive Shopping

Vice-President (Finance) of Koss Corp, makers of head phones and similar accessories has misdirected company's funds to the extent of nearly 20 million dollars to her personal account with American Express. The company was tipped off by the alert American Express about unusually large transfers coming to her account from the company. Sujata "Sue" Sachdeva has confessed. Her husband is a paediatrician and the family's finances were ample.

This is not a run of the mill white collar misappropriation. She is supposed to be a victim of 'oniomania' or 'compulsive shopping syndrome' aka shopaholism. She spent the money on jewellery and apparel. She was very active in social activities and had been working with Koss Corp since 1992. Would American judiciary find her unpunishable because she is a victim of an apparently uncontrollable psychological disorder? This is also an interesting case from the perspective of operational risk management.