Wednesday, January 30, 2008

"A Bank Is Not A Casino"

Verbatim quote from Jean Veil, one of SocGen's attorneys: "Kevriel did not have the right to gamble 50 billion euro. A bank is not a casino."

Oh, really?? Tell that to the tens of thousands of traders who work in dealing rooms as market makers and customer reps (i.e. croupiers), or betting the bank's own money outright (i.e. in-house gamblers). Even theoretically low-risk arbitrage can quickly turn into scary gambling, when the correlations change (just ask the LTCM folks). The lawyer's own statement makes it clear: Kevriel had the right to gamble - it's just that he wasn't authorized to gamble so much.

"Modern" banking has today edged much closer to outright gambling, particularly after the repeal of the Glass-Steagall Act. Sarkozy is 100% correct in saying "the financial system has lost sight of its purpose". It used to be that finance served the real economy, but in the last 10-ish years the world has come upside down and finance has taken center stage, expecting the rest of the economy to service it - or provide a bail out whenever it needs one.

I don't have to go very far to prove it: In 1984, after two years working as an engineer, I was the only member of my graduating class to go into finance (0.28%). A couple of months ago I was amazed to find out that 33% of my alma mater's 2007 graduates went into finance - and we're talking about a traditional "monoline" Joe Engineer school, not some lib arts/finance university.

Banks are not casinos... Who are we kidding here? I, for one, am immune to regular casinos; I find them boring, and so do most of the bank traders I know. The reason? The amounts wagered are incredibly small, by comparison to what goes on in "our" casinos, and the type of bets available are simplistic and unexciting. Wager on "come seven", or "black/red"? C'mon... we need at least a few hundred million to get us excited and much more complex ideas to stimulate our minds. Some, like Monsieur Kevriel, go overboard and cause the house to bust - but this is only a matter of scale, not of function.

Oh yes, M. Jean Veil, today most banks are casinos. Why do you think they need all those sophisticated risk control and oversight systems?


For more information on the subject of financial risk management please see Bookstaber's "A Demon of Our Own Design", in the Amazon sidebar on the right of the screen. The writer is a real pro.


  1. If they are telling the truth about the 'rogue trader', SocGen's PR is about the worst in my memory. If not...well, few people or organizations are good liars.

  2. Perhaps this is a problem with modern finance? Too many engineers and not enough painters and poets. Perhaps painters and poets could have better seen into the dark hearts of those who chose to finance houses with ARMS they could not afford...

  3. You mean engineers should actually design and build stuff, solve problems and innovate, instead of make ungodly amounts of money essentially playing games with OPM?

    Quelle Horreur!

  4. Me thinks people at SocGen have been watching too many Hollywood flicks. Bringing down SocGen solo mio is a job for the likes of Tom Cruise, not a 100k/year peon..

  5. first, we, USA export subprime mortgage toxic waste to banks and institutions around the world. but think about it, we continue to export #1, that is right, dollar, to everyone around the world. yes, dollar is becomming toxic waste with declining value each day like toxic subprime mortgage.

  6. Make sure you're sitting down before you fire up these charts.
    Really Scary Fed Charts, Why Bernanke Will Cut Furiously

    Hat tip to Hellasious.


  7. You mean engineers should actually design and build stuff, solve problems and innovate, instead of make ungodly amounts of money essentially playing games with OPM?

    Engineers may build the car....

    But, it takes a trader to drive it at 150Mph down a winding road, in the dark, in the rain, while chatting on a cell phone.

  8. Hel,

    Well said.

    Do you think we could have a de facto return of Glass-Steagall without changing legislation?

  9. ..about those Fed charts..

    They're more technical adjustments than anything else.

    The first three tell the same story: banks have replaced their own (costlier) money with money borrowed cheaply from the Fed's TAF operations. It's pretty much interest rate arbitrage.

    But perhaps this proves a somewhat more interesting hunch: that there isn't all that much demand for money out there in the economy.

    The monetary base chart is best viewed if you do a transformation to annual percent change. It's going towards zero, and I'm not quite sure what this means. Probably the same as above (low demand for money).


  10. Damn Skippy, Hellasious. I find casinos boring as well for the reasons you describe and more. What the lawyer at Soc Gen should have said is Banks should not function like casinos. And speaking of casinos gentleman place your bets it's Fed day.

  11. re: de facto return of Glass-Steagall

    To the degree that risk exposure is being reduced across the board, yes I do.

    But without legislation the gamblers will be back at the tables as soon as the losses are forgotten. And in our business peoples' memories are unfortunately measured in nanoseconds...

  12. Thank you, H, for this blog. I've been browsing here for about a month, and find discussions very enlightening and stimulating (from one with limited understanding of the topics you explore. A simpleton's question ... have heard that profits in the financial sector have risen from 5% to 25% of the S&P over the last two decades? Is this true?

  13. I don't know the exact figures about the S&P, though that's what (25-30%) various people say (e.g. Jimmy Rogers and Marc Faber).


  14. Hi Hellasious,

    Another great post, thanks.

    What do you make of this post by Mish Shedlock?

    How worried should we be?


  15. H,

    "The monetary base chart is best viewed if you do a transformation to annual percent change. It's going towards zero, and I'm not quite sure what this means. Probably the same as above (low demand for money)."

    It's been going towards 0% change (= no growth) through this decade, because securitization was acting as steriods for the velocity of money. (I.e. the slowing growth of the monetary base was nowhere near enough to offset the vast growth in liquidity due to financial innovation.)

  16. Brokerage houses and banks are being perceived as casinos precisely because they've hired so many mathmeticians and engineers. If you need a PhD and a graphing calculator to make sense of the market perhaps it has gotten too complicated. Most people don't trust what they don't understand so they're going to pull their money out. BTW, who didn't feel a little schadenfreude when the geniuses at LTCM exploded? And perhaps again when Citi announced their billions lost?

  17. I hate going to casinos, it’s so competitive and if you lose you know who has taken your money and can even watch them walk away with it. Plus those high roller casino types you see throwing stupid amounts of money on the table makes everyone fold all the time, it makes things worse! So I’ve started playing online casino blackjack instead, blackjack is a friendlier game as you don’t compete directly against the other players. You’re all just trying to beat the dealer, you don’t hate each other and you can even have a friendly chat.

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