Monday, August 6, 2012

Knight Capital now takes its place in the long line of Wall Street failures. If you think that Washington, the SEC, FINRA, the Federal Reserve, or the banking industry have learned anything from the 2008 meltdown, you must be in a parallel universe. One would think that after Lehman Brothers, Bear Stearns, Wachovia, Washington Mutual, Merrill Lynch etc. went out of business and the world wide banking system was a heartbeat away from total collapse that the survivors would be more careful in their actions. Instead we have had in quick succession MF Global, JP Morgan and now Knight Capital. The common theme is the boys have no idea what they are dealing with in terms of risk. Stop the madness!!

Just to recap
MF Global allows the head of the firm (who is in fact the risk control officer's boss) to trade an enormous position. Who is going to tell him to stop?

JP Morgan loses 5 Billion dollars in a department that the senior management encouraged to take huge positions. The bank's position is" we are big and we can absorb the loss easily". The loss is still 5 BILLION  DOLLARS.

Knight Capital in a rush to meet a deadline introduces an automated trading interface with the NYSE without proper safeguards. The system cannot handle the trading and they lose 400 million in about an hour.

We will now witness the usual Congressional inquiry, the usual SEC promise to do something and the usual talking heads on TV huff and puff about how this never should have happened.

All this begs the question "What's next"? It is illogical given recent history to not expect there are other events already set in motion that will wreak havoc in the future. There is absolutely no evidence that anything has changed since 2008. In fact the recent events are all the more egregious because with a little analysis they are all preventable. Keep your helmet on, the next preventable financial disaster is lurking.

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