Tag Archives: corporate governance

No man can serve two masters

Rogue Trading at Lloyds Bank International, 1974: Operational Risk in Volatile Markets

By Catherine Schenk (Glasgow)

Abstract Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon. To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974. The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all contributed to the largest single loss of any British bank to that time. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system.

Business History Review, Volume 91 (1 – April 2017): 105-128.

DOI: https://doi.org/10.1017/S0007680517000381

Review by Adrian E. Tschoegl (The Wharton School of the University of Pennsylvania)

Since the 1974 rogue trading scandal at Lloyds’s Lugano branch we have seen more spectacular sums lost in rogue trading scandals. What Dr Catherine Schenk brings to our understanding of these recurrent events is the insight that only drawing on archives, both at Lloyds and at the Bank of England, can bring. In particular, the archives illuminate the decision processes at both institutions as the crisis unfolded. I have little to add to her thorough exposition of the detail so below I will limit myself to imprecise generalities.

Marc Colombo, the rogue trader at Lloyds Lugano, was a peripheral individual in a peripheral product line, in a peripheral location. As Schenk finds, this peripherality has two consequences, the rogue trader’s quest for respect, and the problem of supervision. Lloyds Lugano is not an anomaly. An examination of several other cases (e.g. Allied Irish, Barings, Daiwa, and Sumitomo Trading), finds the same thing (Tschoegl 2004).

In firms, respect and power come from being a revenue center. Being a cost center is the worst position, but being a profit center with a mandate to do very little is not much better. The rogue traders that have garnered the most attention, in large part because of the scale of their losses were not malevolent. They wanted to be valued. They were able to get away with their trading for long enough to do serious damage because of a lack of supervision, a lack that existed because of the traders’ peripherality.

In several cases, Colombo’s amongst them, the trader was head of essentially a one-person operation that was independent of the rest of the local organization. That meant that the trader’s immediate local supervisor had little or no experience with trading. Heads of branches in a commercial bank come from commercial banking, especially commercial lending. Commercial lending is a slow feedback environment (it may take a long time for a bad decision to manifest itself), and so uses a system of multiple approvals. Trading is a fast feedback environment. The two environments draw different personality types and have quite different procedures, with the trading environment giving traders a great deal of autonomy within set parameters, an issue Schenk addresses and that we will discuss shortly.

Commonly, traders will report to a remote head of trading and to the local branch manager, with the primary line being to the head of trading, and the secondary line being to the local branch manager. This matrix management developed to address the problem of the need to manage and coordinate centrally but also respond locally, but matrix management has its limitations too. As Mathew points out in the New Testament, “No man can serve two masters, for either he will hate the one, and love the other; or else he will hold to the one, and despise the other” (Matthew (6:24). Even short of this, the issue that can arise, as it did at Lloyds Luggano, is that the trader is remote from both managers, one because of distance (and often time zone), and the other because of unfamiliarity with the product line. A number of software developments have improved the situation since 1974, but as some recent scandals have shown, they are fallible. Furthermore, the issue still remains that at some point the heads of many product lines will report to someone who rose in a different product line, which brings up the spectre of “too complex to manage”.

The issue of precautionary or governance rules, and their non-enforcement, is a clear theme in Schenk’s paper. Like the problem of supervision, this too is an issue where one can only do better or worse, but not solve. All rules have their cost. The largest may be an opportunity cost. Governance rules exist to reduce variance, but that means the price of reducing bad outcomes is the lower occurrence of good outcomes. While it is true, as one of Schenk’s interviewees points out, that one does not hear of successful rogue traders being fired, that does not mean that firms do not respond negatively to success. I happened to be working for SBCI, an investment banking arm of Swiss Bank Corporation (SBC), at the time of SBC’s acquisition in 1992 of O’Connor Partners, a Chicago-based derivatives trading house. I had the opportunity to speak with O’Conner’s head of training when O’Connor stationed a team of traders at SBCI in Tokyo. He said that the firm examined too large wins as intently as they examined too large losses: in either case an unexpectedly large outcome meant that either the firm had mis-modelled the trade, or the trader had gone outside their limits. Furthermore, what they looked for in traders was the ability to walk away from a losing bet.

But even small costs can be a problem for a small operation. When I started to work for Security Pacific National Bank in 1976, my supervisor explained my employment benefits to me. I was authorized two weeks of paid leave per annum. When I asked if I could split up the time he replied that Federal Reserve regulations required that the two weeks be continuous so that someone would have to fill in for the absent employee. Even though most of the major rogue trading scandals arose and collapsed within a calendar year, the shadow of the future might well have discouraged the traders, or led them to reveal the problem earlier. Still, for a one-person operation, management might (and in some rogue trading scandals did), take the position that finding someone to fill in and bring them in on temporary duty was unnecessarily cumbersome and expensive. After all, the trader to be replaced was a dedicated, conscientious employee, witness his willingness to forego any vacation.

Lastly, there is the issue of Chesterton’s Paradox (Chesterton 1929). When a rule has been in place for some time, there may be no one who remembers why it is there. Reformers will point out that the rule or practice is inconvenient or costly, and that it has never in living memory had any visible effect. But as Chesterton puts it, “This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable.”

Finally, an issue one needs to keep in mind in deciding how much to expend on prevention is that speculative trading is a zero-sum activity. A well-diversified shareholder who owns both the employer of the rogue trader and the employers of their counterparties suffers little loss. The losses to Lloyds Lugano were gains to, inter alia, Crédit Lyonnais.

There is leakage. Some of the gainers are privately held hedge funds and the like. Traders at the counterparties receive bonuses not for skill but merely for taking the opposite side of the incompetent rogue trader’s orders. Lastly, shareholders of the rogue traders firm suffer deadweight losses of bankruptcy when the firm, such as Barings, goes bankrupt. Still, as Krawiec (2000) points out, for regulators the social benefit of preventing losses to rogue traders may not exceed the cost. To the degree that costs matter to managers, but not shareholders, managers should bear the costs via reduced salaries.


Chesterton, G. K. (1929) ‘’The Thing: Why I Am A Catholic’’, Ch. IV: “The Drift From Domesticity”.

Krawiec, K.D. (2000): “Accounting for Greed: Unraveling the Rogue Trader Mystery”, Oregon Law Review 79 (2):301-339.

Tschoegl, A.E. (2004) “The Key to Risk Management: Management”. In Michael Frenkel, Ulrich Hommel and Markus Rudolf, eds. Risk Management: Challenge and Opportunity (Springer-Verlag), 2nd Edition;

Medieval History and its Relevance to Modern Business

Joint publication review with The Long Run Blog


Title: The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions

The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions


By: Carmine Guerriero (ACLE, University of Amsterdam)

Abstract: This paper evaluates the relative importance of a “culture of cooperation,” understood as the implicit reward from cooperating in prisoner’s dilemma and investment types of activities, and “inclusive political institutions,” which enable the citizenry to check the executive authority. I divide Europe into 120 km X 120 km grid cells, and I exploit exogenous variation in both institutions driven by persistent medieval history. To elaborate, I document strong first-stage relationships between present-day norms of trust and respect and the severity of consumption risk-i.e., climate volatility-over the 1000-1600 period and between present-day regional political autonomy and the factors that raised the returns on elite-citizenry investments in the Middle Ages, i.e., the terrain ruggedness and the direct access to the coast. Using this instrumental variables approach, I show that only culture has a first order effect on development, even after controlling for country fixed effects, medieval innovations, the present-day role of medieval geography, and the factors modulating the impact of institutions. Crucially, the excluded instruments have no direct impact on development, and the effect of culture holds within pairs of adjacent grid cells with different medieval climate volatility. An explanation for these results is that culture, but not a more inclusive political process, is necessary to produce public-spirited politicians and push voters to punish political malfeasance. Micro-evidence from Italian Parliament data supports this idea.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:70879

Circulated by NEP-SOC on 2016-05-14

Reviewed by Catherine Casson (University of Manchester) and Mark Casson (University of Reading)

This paper takes a long-run approach to an investigation of the importance of a ‘culture of cooperation’ and ‘inclusive political institutions’. The author defines a ‘culture of cooperation’ as the behavioural characteristics of ‘trust, respect, control and obedience’, while the term ‘inclusive political institutions’ is defined as institutions which ‘enable the citizenry to check the executive authority’.

Analysis is focused on Europe and on the agrarian economy. The author suggests that cooperation in the middle ages was particularly associated with the monastic orders of the Cistercians and Franciscans. Their houses were generally located, the author argues, in areas with unpredictable climates. The ability of the monks to farm the land in a way that put such unproductive land to productive use attracted the support and cooperation of the local community. In addition these monastic orders also introduced new financial practices, including improvements in access to credit, which also fostered local community cooperation. Inclusive political institutions, the author suggests, were especially associated with the success of long-distance trade. This created a shared goal between the elite and citizens.


The paper suggests that contemporary cultures of cooperation and inclusive political institutions are influenced by medieval ones. The medieval data used for ‘culture’ is climate data and the modern data is the 2008 European Value Study. For inclusive political institutions the medieval data is ‘the discounted number of years Cistercian and Franciscan houses were active per square km over the 1000-1600 period’ (p. 9) while the modern data is on prosecutions of members of parliament in Italy in 1948-87.

Later in the paper some more specific hypotheses are presented as controls for change over time:

  1. That Atlantic trade impacted on modern economic development
  2. That micro-credit systems introduced by the Franciscan order strengthened contemporary credit markets
  3. That monastic orders influenced religious beliefs in general, and that this influence may have had other, less defined, influences, on economic practice
  4. That distance to Wittenberg, where Protestantism began, influenced the development of a ‘culture of cooperation’
  5. Early transition to agriculture led to ‘higher inequality in gender roles’
  6. That genetic diversity in a country had a negative impact on cooperation
  7. That the suitability of soil for potato growing contributed to the development of institutions
  8. That the Black Death raised standards of living
  9. That education influenced the development of institutions and economic growth

The paper argues that the impact of the medieval culture of cooperation originating in the Cistercian and Franciscan monastic houses can be seen today. It also argues that this culture of cooperation has had a greater influence as a check on executive authority than inclusive political institutions.

Conflict, rather than cooperation, is often the term most associated with the middle ages. One of the benefits of this paper is that it highlights the presence of, and impact of, collaboration. Monastic orders are recognised in both history and economics literature for their important economic, as well as religious, impact. Their use to assess a culture of cooperation is therefore helpful, but they are perhaps a less obvious choice for an assessment of inclusive political institutions. One potential way in which the paper could be developed would be by expanding the scope to cover both urban and rural locations. Such an extension would retain the presence of monastic orders (and indeed extend it to cover urban ones) and, more significantly, allow urban political institutions to be considered. The presence of these institutions is briefly discussed on p. 12 but the issue is not developed further. Many of these town governments had as a shared goal the long-distance trade alluded to in the paper. They also offer more equivalent data to the contemporary data used as a proxy for inclusive political institutions.


Continuity and change over time is a key focus on the paper and the author shows an awareness of some key developments that occurred from the medieval to the modern period. The selection of the controls shows an engagement with recent secondary literature but does introduce additional time periods (such as the Neolithic), specific events (for example the Black Death) and general trends (for example the expansion of education). The paper could be strengthened by more clearly outlining the chronology of these events, and perhaps by narrowing the list of controls used.

Connections between contemporary and historic business have been increasingly recognised and explored in academic literature. The subject of this paper is therefore related to a growing trend to examine the medieval origins of many economic processes. Monasteries have been identified as key players in the ‘multinational enterprise’ of medieval pilgrimage and as originations of sophisticated forms of financial transactions (Bell and Dale, 2011; Bell, Brooks and Dryburgh, 2007). They were also important speculators in the property market (Baker and Holt, 2004; Bouchard, 1991; Casson and Casson, 2016).


Financial crises are a further topic that can be examined through the surviving qualitative and quantitative sources from the middle ages. In the light of the financial crisis of 2008 there has been a recognition that a long-run perspective, starting as early as the middle ages, provides the opportunity to study cycles of growth and decline. Surviving medieval records from the English government, for example, provide detailed data that can be subjected to statistical analysis, as shown in the work of Bell, Brooks and Moore (Bell, Brooks and Moore, 2014; Bell, Brooks and Moore, 2013). The importance of medieval data has also been highlighted in recent work on historic GDP (Broadberry et al, 2015).

Innovation and knowledge acquisition in the middle ages have recently been examined using both modelling approaches from economics, and historical case studies. De la Croix, Doepke and Mokyr (2016) have shown, using their combined expertise in the fields of economics and history, the important foundation that medieval guilds provided in the transmission of knowledge across Europe before the Industrial Revolution. Meanwhile Davids and de Munck’s edited collection on Innovation and Creativity in Late Medieval and Early Modern European Cities has used historical case studies to demonstrate that medieval cities saw a clear connection between the skills of their population and the overall economic performance of their city, and developed strategies that were intended to make their city economically resilient (Davids and De Munck, 2014; Casson, 2012).

Entrepreneurship can also be examined in a long-run context. Business records, letters, literary sources and government records all demonstrate that, contrary to popular belief, the origins of enterprise lie in the middle ages rather than the Industrial Revolution. Medieval entrepreneurs were involved in a range of activities, including infrastructure developments, property speculation and factory foundation (Casson and Casson, 2013a; Casson and Casson, 2013b; Landes, Mokyr and Baumol, 2012)

Overall, one of the key strengths of this paper is the contribution that it makes to this broader research agenda on the parallels between medieval and modern business.



Baker, N. and R. Holt (2004), Urban Growth and the Medieval Church: Gloucester and Worcester (Routledge, Aldershot).

Bell, A. R.Brooks, C. and Moore, T. K. (2014), ‘The credit relationship between Henry III and merchants of Douai and Ypres, 1247-70’, Economic History Review, 67 (1), 123-145. doi: 10.1111/1468-0289.12013.

Bell, A.Brooks, C. and Moore, T. (2013), ‘Medieval foreign exchange: A time series anaylsis’ in M. Casson and N. Hashimzade (eds.) Large Databases in Economic History: Research Methods and Case Studies (Routledge, Abingdon), 97-123.

Bell, A. R. and Dale, R. S. (2011), ‘The medieval pilgrimage business’, Enterprise and Society, 12 (3), 601-627. doi: 10.1093/es/khr014.

Bell, A. R., C. Brooks, C. and P. R. Dryburgh, P. R. (2007), The English Wool Market, c.1230-1327 (Cambridge University Press, Cambridge).

Broadberry, S., B. Campbell, A. Klein, M. Overton and B. van Leeuwen (2015), British Economic Growth, 1270-1870 (Cambridge: Cambridge University Press).

Bouchard, C. B. (1991), Holy Entrepreneurs: Cistercians, Knights, and Economic Exchange in Twelfth-century Burgundy (Ithaca, NY).

Casson, C. (2012), ‘Reputation and Responsibility in Medieval English Towns: Civic Concerns with the Regulation of Trade’, Urban History 39 (3), 387-408. doi:10.1017/S0963926812000193.

Casson, C. and Casson, M. (2016), ‘Location, Location, Location? Analysing Property Rents in Medieval Gloucester’ Economic History Review 69: 2 pp. 575-99 DOI:10.1111/ehr.12117.

Casson, M. and Casson C. (2013), The Entrepreneur in History: From Medieval Merchant to Modern Business Leader (Basingstoke: Palgrave Macmillan).

Casson, M. and Casson C. eds. (2013), History of Entrepreneurship: Innovation and Risk Taking, 1200-2000 (Cheltenham: Edward Elgar, 2 vols).

Davids, K. and B. de Munck, eds. (2014), Innovation and Creativity in Late Medieval and Early Modern European Cities (Ashgate: Farnham).

De la Croix, D., M. Doepke and J. Mokyr (2016), ‘Clans, Guilds, and Markets: Apprenticeship Institutions and Growth in the Pre-Industrial Economy’ NBER Working Paper No. 22131, circulated by NEP-HIS on 2016-04-16.

Landes, D. S., J. Mokyr & W. J. Baumol (2012), The Invention of Enterprise:Entrepreneurship from Ancient Mesopotamia to Modern Times (Princeton, Princeton University Press).

Help or Hindrance? Business and Welfare Policy Formation

Bringing Power Back In: A Review of the Literature on the Role of Business in Welfare State Politics

by Thomas Paster (Central European University and Max Planck Institute) (thomas.paster@eui.eu)

URL http://d.repec.org/n?u=RePEc:zbw:mpifgd:153&r=his

Abstract What is the impact of business interest groups on the formulation of public social policies? This paper reviews the literature in political science, history, and sociology on this question. It identifies two strands: one analyzes the political power and influence of business, the other the preferences and interests of business. Since the 1990s, researchers have shifted their attention from questions of power to questions of preferences. While this shift has produced important insights into the sources of the policy preferences of business, it came with a neglect of issues of power. This paper takes a first step towards re-integrating a power-analytical perspective into the study of the role of business in welfare state politics. It shows how a focus on variation in business power can help to explain both why business interest groups accepted social protection during some periods in the past and why they have become increasingly assertive and averse to social policies since the 1970s.

Reviewed by Mark J Crowley


This paper was circulated by NEP-HIS on 2015-04-19.  It is a meticulously review of a topic that is now becoming a subject of major debate in the developed world’s political culture.  At a time of austerity and belt-tightening in much of the western world in response to the economic crises of recent times, the welfare state has been targeted as an area where potential savings could be made, prompting arguments that the construct itself has become the scapegoat of austerity. Much of the attention in the recent literature on the welfare state has examined the political and social considerations behind the formation of a welfare system and its reform.  This paper hones in on an aspect that has received less attention: the role of business in the formation of welfare state policy.  Although there is still significant literature on this topic, the paper manages to draw the current research together into a coherent whole to present numerous interesting theories about the development and role of big business in public policy formulation that will be of interest to historians.


Paster embeds his argument in the Marxist critiques of the 1970s that claimed much of the decisions concerning the level of influence exercised by business in state affairs depended on their relative power and individual preferences.  He cites the fact that the state’s dependence on private business for capital does give the latter, by default, a greater level of influence over public policy.  Furthermore, with the development of Marxist theory in the 1980s with the rise of Conservative policies, especially Thatcherism in the UK and Reagan’s economics in the USA, the ‘varieties of capitalism’ approach has led scholars to examine the development and evolution of the welfare state from a different perspective.  Many have now seen a link between the influence of business preferences and the level of support offered to policy options concerning welfare reform.  Moreover, the growth of interest groups in response to the increased size of the state has seen more actors playing a part in the negotiations of public policy, particularly state welfare.

Paster outlines how much of the literature has focused on the nature of power dynamics within the business community, and its relative influence over public policy.  In many nations, leaders of corporations form a major part of the power elite. It could be argued that this was why, in many developed nations there was significant opposition to the legislation proposed for a national minimum wage for low paid workers, primarily owing to the increased costs that this would bring.  This could also have influenced the greater outsourcing of work, primarily service-based industries and call-centre work to nations such as India.  Furthermore, he outlines how there is evidence that during times of economic difficulty, both the public and business are reluctant to see greater state intervention, and that a more cautious approach does led to a relative neglect in the nature of welfare provision for the most vulnerable in society.


One of the most interesting arguments articulated by Pester in this paper is how big businesses prefer to increase the level of skills among its workforce as a means of protecting against future unemployment.  The argument focuses on how business leaders believe that highly-trained workers, in the event of finding themselves unemployed, would then be easily able to find alternative employment owing to their skills, thus reducing dependency on the state.  This has become more important with globalisation and the internationalisation of the economy.  Yet despite the growing importance of international trade, and the growing economic relationship with not only European countries but developing nations, this has also brought pressure on the development of coherent policies to assist workers.  While the idea of policy transfer could be regarded as positive, with nations comparing its social policy and potentially embracing new ideas in the aim of improving life for its lower paid citizens, international trade has also brought about increased regulation, thus increasing the influence of both businesses and the state over the development of public policy.  This, therefore, is a double-edged sword which carries numerous positive elements but also several complicating factors.


This paper is very strong.  It shows a deep understanding of many of the issues concerning public policy development in many European countries, and the USA in the twentieth century.  In focusing on the role of big business in policy considerations, it approaches the issue of welfare reform and development from an interesting angle.

My observation on this paper would be that perhaps in trying to compare so many nations in one short article, perhaps the author is seeking to do too much.  In much of the comparative literature on the welfare state (albeit not from a business perspective) authors seek to compare two nations.  This paper has a much wider remit.  Furthermore, although the primary focus of this paper is on the role of business in the discussions concerning welfare state policy, I do feel that maybe it could benefit from some additional information, maybe only a paragraph or two, to help set the context.  The political culture concerning state welfare is different in each of the countries examined in the research.  The motivations and the political responses to the original formation of the welfare state were different among the respective politicians.  For example, it could be argued that in Britain, the earliest advocate of the welfare state in the government, Prime Minister Benjamin Disraeli, did so because of his fear that if there was no provision for the working-class, it could result in a revolution.  For the USA, the growth in welfare programmes came much later with the development of Roosevelt’s new deal.  Furthermore, the development of such policies in a very politically-conservative nation was ravaged with difficulties.  For the British case in particular, I would encourage the author to consult the numerous works of Pat Thane on the topic, which place the formation of the welfare state into the wider political and international context.  While this is only a minor criticism of an extremely well-researched paper, placing this paper in the wider political context would help strengthen the argument and highlight even more the significance and value of this research to the wider academic community.



Baldwin, Peter, The Politics of Social Solidarity: Class Bases and the European Welfare State 1875-1975 (Cambridge: Cambridge University Press, 1990).

Thane, Pat (ed.) The Origins of British Social Policy (London: Croom Helm ; Totowa, N.J.: Rowman & Littlefield, 1978).

Thane, Pat, The Foundations of the Welfare State, (Harlow: Longman, 1982).