The article by the Associated Press is written so well, it is hard to add much comment. I will do my best to keep the quotes brief, but I recommend reading the full article.

This highlights the ever-present insider issue. My first concern is that there is a lot of emphasis on motive, and most conclusions suggest none “rational”:

“This is a bad time for banks and the industry in general. But detecting the fraud over the weekend was problematic because world stock markets on Monday and Tuesday fell hugely around the world. When the positions had to be unwound, the bank did that in a terrible market of falling equities,” said Janine Dow, senior director at Fitch Ratings financial institution group in Paris

“In hindsight, it was this guy’s superior knowledge of the control system of every aspect of trading at the bank that allowed him to build up fraudulent positions and hide them,” she said.

The bank said the trader had misled investors in 2007 and 2008 through a “scheme of elaborate fictitious transactions.” The trader, who was not named, used his knowledge of the group’s security systems to conceal his fraudulent positions, the statement said.

The man admitted to the fraud, the bank said, and was being dismissed. Four or five of his supervisors were to leave the group. Bouton offered to resign but the board rejected that.

So motive is unclear, but method and consequences are easy to document.

Axel Pierron, senior analyst at Celent, an international financial research and consulting firm, was stunned that 13 years after the Barings collapse, something similar has happened.

“The situation reveals that banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can getting round them to hide his losses,” he said.

If the controls are easy to circumvent without detection, why should we assume that they will not be circumvented without detection? Implicit in the article is that the trader was given a lot of leeway and trust, which seems the opposite of what an effective control system is meant to do. Bottom line, one introduces extreme social, cultural, and psychological (to name a few) risks/unpredictable results by basing controls on motives of users.