Everlast Financial: A Fictional Rogue Trader Crisis in 2020
Book: Enterprise Risk Management: From Incentives to Controls
Author: James Lam
ISBN: 978-1-118-41361-6
Chapter 20 is a short fiction piece. James Lam wrote it as a glimpse of what risk management might look like in the future. It’s set in 2020 at a made-up company called Everlast Financial.
The Morning Alert
Pamela is the Chief Risk Officer at Everlast Financial, a global firm with investment banking, commercial banking, and insurance operations. She spent five years as a trader and three as a market risk manager before becoming CRO.
One morning at breakfast, her cellular watch starts beeping. “Operational Risk Alert.” She logs into the global risk management system. Before she can even check the monitoring program, Garrett (Chief of Staff) appears on her screen via videoconference.
The news: a rogue trader. While reviewing records for annual compensation, the firm found fake transactions in Rick Gleeson’s accounts. He’d hidden about $200 million in trading losses on emerging markets bonds over nine months.
Pamela moves fast. She sets up a videoconference with the CEO, audit committee heads, trading unit, corporate communications, legal, and HR. The goal: figure out what happened, why, and what to do next.
The CEO Takes Control
The next day, CEO Brandon calls Austin, head of trading, into his office. Trading had generated nearly half of corporate profits for three years. But this was serious.
Austin’s response was telling. He assumed risk systems would catch this. Rick was a talented trader who got unlucky in a rocky market. If the gambles had paid off, they’d be celebrating instead of in crisis. His punishment recommendation: forfeit Rick’s bonus. Not fire him.
Brandon didn’t buy it. The company had a zero-tolerance policy. Austin’s willingness to overlook policy violations for profit was a bigger risk than losing one trader. Brandon fired both Austin and Rick on the spot.
HR and Culture Lessons
Brandon then met with Jennifer, head of HR. Two lessons jumped out from the investigation:
- Rick never took vacations longer than two days. That’s a classic red flag for rogue trading.
- His trading volume and patterns were unusual compared to other traders.
Brandon asked HR to produce an annual vacation report flagging employees who hadn’t taken at least a week off. He also wanted the incident turned into a training video on the risk intranet, with him speaking directly to set the tone from the top.
Insurance Saves the Day
Meanwhile, COO Curtis met with Peter, head of risk transfer. Good news: Everlast’s integrated risk policy covered operational risk failures like rogue traders. After a $10 million deductible, they were covered up to $1 billion.
Peter also looked into earnings-per-share (EPS) insurance. He went to risk.com (a fictional internet risk exchange), submitted a standardized term sheet with the firm’s loss history and enterprise risk rating, and got five quotes in 10 minutes. Two quotes beat the cost of retaining the risk. His analysis showed EPS insurance could boost market value by 4-5%. He executed the deal with a European insurer.
Early Warning and Transparency
Brandon asked Garrett to build new early warning metrics for rogue trading activity. He wanted to compare Rick’s behavior against other traders from every angle possible. Maybe even share data with other financial institutions to spot patterns together.
Brandon also set up videoconferences with board members and equity analysts. His key messages:
- State-of-the-art risk management can’t prevent every bad event, but ERM investments caught this early.
- The company will communicate openly about the situation.
- Steps are being taken to prevent repeats: vacation reports, better operational risk reporting, training videos, and firing both the rogue trader and his manager.
- Insurance coverage means earnings won’t take a major hit. EPS insurance adds broader protection going forward.
What This Story Teaches
The Everlast case study isn’t about perfect risk management. A rogue trader still caused $200 million in losses. But compare it to historical disasters where rogue trading went undetected for years.
What made the difference:
- Real-time alerts reached the CRO and CEO immediately
- Technology-enabled response (videoconferencing, instant escalation)
- Insurance coverage for operational risk failures
- Zero-tolerance culture enforced from the CEO down
- Lessons learned turned into HR policies, training, and early warning systems
- Risk transparency with board and analysts
Brandon went home that night knowing that if anything else happened, he’d be among the first to know. That’s the point Lam is making. ERM doesn’t eliminate risk. It gives you the tools, culture, and processes to catch problems early and respond fast.
The next section of the book shifts from vision to implementation. Chapter 21 starts with Lam’s real-world experience building ERM at GE Capital.
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