Rogues of Wall Street

Rogues of Wall Street analyzes the recent risk failures and errors that have overwhelmed Wall Street for the past decade. Written by a veteran risk, compliance, and governance specialist, this book helps bank leaders and consultants identify the tools they need to effectively manage operational risk. Citing different types of risk events such as: Rogue and Insider Trading, cyber security, AML, the Mortgage Crisis, and other major events, chapters in the first half of the book detail each operational risk type along with its causative and contributing factors. The second half of the book takes an overarching approach to the tools and solutions available to financial institutions to manage such events in the future. From technology, to culture, to governance, and more, this book does more than simply identify the problem—it provides real-world solutions with actionable insight.

Expert discussion identifies the tools financial institutions have at their disposal, and how these tools can be leveraged to create an environment in which catastrophic events are prevented or mitigated. In-depth insight from an industry specialist provides thought-provoking guidance for leaders seeking more effective risk management, and specifically addresses how to:

• Analyze major operational risk incidents and their underlying causes
• Investigate the tools that allow organizations to prevent and mitigate catastrophic events
• Learn how culture and governance can be optimized to support effective risk management
• Identify ways in which cognitive technologies could help your firm avoid losses

Cognitive technologies have the potential to revolutionize the way business is done; eliminating the speed/cost/quality trade-off, these new and emerging tools are heralding the next leap in the evolution of risk management. Rogues of Wall Street shows you how bring these tools into your organization, and how they can contribute to your financial success.

Introduction: A Risky Business ix

Acknowledgments xvii

About the Author xix

1 The Historical Context 1

2 The Rogue Trader 7

3 Genius Traders: Who They Are and How to Catch Them 19

4 Insider Trading 27

5 Price Manipulation Risk: The Big Unknown 37

6 The Mortgage Mess 45

7 Ponzi Schemes and Snake Oil Salesmen 53

8 Rogue Computer 63

9 Funding the Bad Guys—Winning the AML Battle 73

10 Litigation and Big Data Risk 85

11 Twitter Risk and Fake News Risk 91

12 Spreadsheet Risk: Should We Ban Excel? 95

13 Acts of God Risk 99

14 Cybersecurity— The Threat from Outside and Inside the Firewall 101

15 Turning the Tables on Risk 107

16 Building the Right Culture: Values, Organization, and Culture 113

17 The 360-Degree Risk Management Function 123

18 What We Talk about When We Talk about Risk 137

19 The Future Is Unknowable, the Present Burdensome; Only the Past Can Be Understood 147

20 The New Tools of the Trade 159

21 Cognitive Technologies 169

22 The Role of Government and Regulators in Managing Risk 177

23 Case Studies and Guiding Principles in Planning for Disaster 185

24 The Risk Management Society and Its Friends 191

25 Conclusion: Seven Traits for Successfully Managing Cognitive Risk 203

Index 207

ANDREW WAXMAN is an associate partner in IBM's Financial Services Risk and Compliance consulting practice with over 20 years of experience, in the United States and the United Kingdom, helping financial services organizations manage complex business issues. Andrew has written on risk and banking issues in industry journals, such as American Banker and Wall Street and Technology, for many years.

The last decade has seen the financial markets reshaped by innovations in technology and financial engineering as well as the resulting risk failures and errors of a changing industry. From rogue trading and price manipulation to Madoff, the mortgage crisis, and more, one thing is clear—the solutions to effective risk management depend on people acting lawfully and operating with timely, accurate data capable of highlighting emerging internal and external threats. Rogues of Wall Street takes you inside the biggest operational risks threatening the banking industry today and prescribes a state-of-the-art approach to stopping them all and mitigating future events with cognitive technologies.

Written by one of IBM's top thought leaders in financial strategy, Andrew Waxman, this immediately useful guidebook offers peerless access and insight into how experts on the cutting edge of risk management are efficaciously tackling and preventing the new hazards in banking. The first part of the book is an illuminating primer, leveraging only publicly available sources, to the high-profile catastrophes that shook investment houses and securities firms, including the major players, underlying factors, and ways to prevent similar events in the future. Next, it takes you through the most innovative tools and tactics now being used to guard against losses and reputational damage and demonstrates how you can use them to identify risky behaviors at your institution. No other single resource enables you to more quickly find and completely fortify your vulnerabilities by:

• Using psychological insight and data analytics to create employee incentives and programs to drive improved outcomes and prevent risky behaviors
• Applying analytic cognitive technology to drastically heighten surveillance of trades and communications
• Implementing and sustaining a 360-degree risk culture with practical guidance from real-world examples and powerful tools

Rogues of Wall Street pulls back the curtain on the bad actors contributing to your operational risk and gives you the tools and know-how to develop a culture where they can't exist.

PRAISE FOR ROGUES OF WALL STREET

"Andrew Waxman digs deep into some of the pitfalls of risk-taking, going beyond the financial crisis to provide a comprehensive look at threats faced by the modern banker."
—JOE ADLER, Editor, BankThink Blog

"Important and timely. Waxman shows how easily banks' defenses can be breached by skilled and resourceful rogues."
—BEN MCLANNAHAN, US Banking Editor, Financial Times

"Waxman's book is a thorough and expert assessment of the threats faced by risk managers on Wall Street today. His analysis also provides a very useful guide to how to prevent and avoid them in the future."
—SANNY MAKKI, Vice President, IBM Global Business Services, Banking and Capital Markets

FILL THE HOLES IN YOUR RISK MANAGEMENT STRATEGY WITH THE LATEST COGNITIVE TECHNOLOGIES

Rogues of Wall Street is the must-have guide for bank leaders and consultants who need the latest tools and techniques for managing operational risk in the complexities of today's digital processes and regulations. Banking institutions must protect themselves from a diverse variety of events putting their operations at risk, and this comprehensive resource offers high-level insight and on-the-ground solutions to collecting and analyzing the proper data to pick up on irregularities and promote a workplace culture that thrives on and rewards above-the-board ethics. This single resource enables you to:

• Enhance your real-world practice with relevant analysis of the most recent major operational risk incidents, including what caused them and how best to prevent them
• Optimize your institution's culture and governance to empower your risk management program
• Save time and money by understanding which cognitive technologies can be used to avoid losses and where to use them

Rogues of Wall Street is your complete source for authoritative guidance and actionable advice.