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The bankers who tried to profit from loss.

The bankers who tried to profit from loss

Heard about the bank official who claimed to have been hypnotised and forced to transfer $245 million into accounts around the world?

A director at the bank and four colleagues were later sentenced to three years in prison for embezzling the money. They said they stole it to give to a gang that had promised to double the amount by black magic.

It is one of one of the more unusual ways in which banks across the world have contrived to lose money. In the August 2011 issue of Financial World Christopher Fildes describes some more.

The grandiose-sounding European Union Bank - registered in Antigua by two Russians in 1994 and marketed as the first offshore bank on the internet - advertised for deposits at attractive rates of interest. When the Russians had attracted enough money, they disappeared and their bank 'vanished into cyberspace'.

BestBank, of Boulder, Colorado, started lending on credit cards, at high rates of interest, to so called 'sub-prime' borrowers - essentially high-risk borrowers with poor credit ratings. The bank issued more than 500,000 new cards as it built up its loan book from $10 million to $348 million in four years. Depositors were attracted by above-market interest on their savings, offered over the internet.

In the boom times, the senior executives rewarded themselves with multi-million-dollar bonuses. But when the bubble burst, the bank left behind, in the words of the author, 'nothing but a patch of moisture and a hole where $200 million was meant to be'.

While each of these cases involved fraud, Fildes also highlights examples where weak or non-existent management control ended up costing institutions a fortune.

One large bank, with only minimal business in Russia, lost £250 million when the Russian government defaulted on its own bonds. Another famously went bust when its star derivatives trader was discovered too late to have lost his employer and its clients hundreds of millions of dollars.

In his book 1,000 Days at No. 11, former UK chancellor of the exchequer Alistair Darling is scathing about Britain's bankers at the time of the 2008 crash, saying that some 'were so arrogant and stupid that they might bring us all down'. In their study of political leaders between 1875 and 2004, in the Volume: 121 Issue: 554 of The Economic Journal Besley et al. show that countries' rates of economic growth were highest when more highly educated leaders were in power. It is tempting to conclude from this that the leaders of any organization are more effective if they have a string of letters behind their names.

But it is not always a question of academic performance. Sometimes, simple common sense is all it takes. Fildes reports, for example, on one bank chairman who had risen through the ranks and knew how not to be bamboozled by the high-flyers in his organization's dealing rooms.

'He would give them three chances to explain their new ideas,' says the author. 'Anything that they could not make him understand, his bank would not do.'

Sounds like a good way to incentivise indigenous low investment-return volatility to me!