Colin Barr

Following the money in banking, economics, and Washington

How to rope rogue traders

October 7, 2010: 11:06 AM ET

Wall Street is too cool for its own good.

So says Aswath Damodaran, a finance professor at New York University who is considering how to prevent the next Jerome Kerviel. The former Societe Generale trader was convicted of fraud after losing $7 billion of the French bank's money.

Kerviel, pictured in 2008

Kerviel was sentenced this week to jail time and a $6.8 billion fine, more than two years after the bad trades turned up. The penalty will take Kerviel 177,000 years to pay off, which strikes some as absurd, given the obvious failures of bank officials to rein the rogue trader in.

Damodaran, pondering how such ridiculous risk taking went unheeded for so long, arrives at three conclusions: investment bank trading floors are "overpopulated" with young, risk-embracing men; traders damn the torpedoes when playing with other people's money; and those who lose on a bet are apt to double down rather than take losses.

So how to improve bank risk management and prevent another Kerviel? Damodaran calls for better information systems and restrictions on proprietary trading, but he also urges banks to start hiring a different sort of trader.

I am not a fan of diversity for the sake of diversity, but I think that opening up trading rooms to a wider range of people will dampen some of the excess risk taking. Maybe we should hire every trader's mother or grandmother to trade side by side with him; in fact, I would give her the next desk.

Seriously, though, this will require investment banks to revamp their hiring processes and look more kindly on those "not cool" kids on campus who right now would not make the cut.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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