`Phantom' Trades

ALLEGATIONS of fraudulent bond trading at investment house Kidder, Peabody & Company is another unfortunate reminder that scandal is no stranger to Wall Street.

Reportedly, two or more government bond traders for Kidder conducted ``phantom'' trades that resulted in paper profits of about $350 million for the investment house, while masking actual losses of about $100 million; the ``trades'' also meant lucrative bonuses for the traders, since Kidder based compensation on performance.

Kidder, Peabody has been wholly owned by General Electric Company since 1990. John Welch, GE's highly-regarded CEO, took quick action to get to the bottom of the scandal. Mr. Welch was reportedly heading out on vacation when he first learned of the allegations involving Kidder; he immediately cancelled his vacation.

As explained by Kidder and GE officials, a top Kidder government bond trader, perhaps working alone, perhaps with others, used elaborate computer programs to create an appearance of profits where none existed.

Kidder, Peabody is only the latest in a long line of Wall Street investment houses tarnished by wisps of scandal. Instances of venality have turned up almost every decade, including the highly publicized insider trading and junk bond scandals of the 1980s.

Some details remain unclear in this latest scandal, such as the number of individuals involved.

Still, the Kidder case points out the need for vigilance on Wall Street. Kidder's managerial oversight of its top executives appears to have been lax. The director of Kidder's government trading desk appears to have been promoted to his job despite lacking qualifications.

The case underscores the enormous pressure to succeed that many traders feel in continually having to exceed performance goals. And tying compensation to profits can result in distortions; the top Kidder government bond trader, for example, apparently made twice the amount of money last year that CEO Welch of GE earned through his regular pay plus bonuses.

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