Lesson 1: A financial firm should not have an employee in a key control position who is fundamentally disgruntled with the company. This can easily occur as a new person is integrated into an existing management team.

Lesson 2: Firms should do their best to smooth an employee's transition into a new position. Financial firms should not accept intolerance of a control person by the control person's superiors or other business colleagues. By the nature of the job control people are not the best buddies of line business managers and indeed it would be questionable if they were.

Lesson 3: Firms should by and large avoid dual reporting relationships. Where such relationships are necessary, and they of course are necessary from time to time, for example in respect of the internal audit function, senior management must make a huge effort to minimize ambiguities so that it is clear which manager has responsibility for what and that both managers will be held accountable if the employee does not perform well.

Lesson 4: An executive, however talented, should never, never be given responsibility for both the front and back offices of a trading operation. The front and back offices should always report separately as high up in the organization as possible.

Lesson 5: Only in the most extraordinary circumstances should a lone wolf proprietary trading operation be permitted. There are substantial safety and soundness advantages to a trading group. It is harder for a trader to hide fraud in a trading floor, bull pen environment. In addition, a lone wolf proprietary trading operation almost never can earn sufficient revenue safely to justify the kind of quality middle and back office risk management personnel and systems that are necessary for safe operation.

Lesson 6: Employment arrangements that encourage traders to take exceptional risks should be highly discouraged, if not outright prohibited. Indeed, at the heart of many safety and soundness problems are employment incentives that are skewed the wrong way. I must say that here is a critical area where the legal function can play an immensely important role in the whole safety and soundness fabric of the bank-- and that is in the employment contract area. Insisting that employment contracts come through legal, and that they meet certain standards, which your general counsel's office sets, can be one of the key contributing factors in safer financial services firms.

Lesson 7: Be extremely skeptical of a trader who wants to employ new trading strategies, particularly in a small regional bank where the entity has no natural edge in the area. It is one thing for a smaller organization to allow trading in a known commodity, say wheat futures in Kansas. It is quite another to allow trading in foreign currency at a small bank in the suburbs, for example.

Moreover, it is essential for management to have a meticulous understanding of the trading strategy used and the modeling techniques and infrastructure employed before allowing the strategy to be employed.

Mathematical models are complex whether used in a trading or risk management context. I found several times in recent years that the models used were often new and that minute errors in creating the models or populating them with information could make dramatic changes in what they predicted. I have also found that in fact, few people really understand the models fully and they tend not to be vigorously or effectively audited.

This is really a big issue for banks and regulators going forward. In future years models will become even more a part of the fabric of financial companies, particularly as entities grow in size. It is going to be ever more critical to insist that these models be understood and fully and effectively audited.

Although models are typically not within the legal counsels official purview, to my mind the legal team in a bank is often one of the sharpest areas analytically, and I would encourage you to review models and make comments wherever possible. Frequently, it is someone outside the modeling team with analytical skills and a bigger picture viewpoint that makes the best comments.

Lesson 8: Do not rely on outward appearances. Sometimes it does not mask an inward grace.

Lesson 9: Never tolerate bullying, particularly of control personnel. Here is yet another area in which the general counsel's office should have an important role to play -- and that is reviewing and commenting on, if not creating, personnel policies. These policies and procedures should not allow bullying of any bank personnel but of course particularly control personnel. And, for those banks where the compliance function is under the general counsel, this is of course a key policy area that should be monitored by the general counsel's minions for compliance.

Lesson 10: Beware of an employee who is too ingratiating.

Lesson 11: Where an entity engages in proprietary trading, merely "good" systems are not good enough. For proprietary trading, and indeed perhaps for all trading, state of the art systems should be required.

Lesson 12: A counterparty should not allow itself to be bullied by a clien.. Here again, to the extent that the general counsel helps create the personnel policies and/or monitors them for compliance this is an area where policies should be clear and strongly enforced.

Lesson 13: Traders should not be permitted to be lavishly entertained by counterparties. Again, this is an area where the general counsel can help in both the rule writing and compliance areas.

Lesson 14: No employee should ever be permitted to get around the 2 week vacation rule in any way. When you are a bank employee and out of the office for 2 weeks, you should sever all ties to your business responsibilities. Again, here is an area where strong policies and compliance would have been greatly helpful.

Lesson 15: Control personnel should understand their responsibilities and should be admonished to fulfill their responsibilities with great vigor to the absolute end of any inquiry, and of course I am including legal personnel here.

Lesson 16: A company must have top quality control and risk personnel.

Lesson 17: Key risk control personnel must have backbone, and must have the ability to, indeed must be encouraged to, forcefully tell the chairman and where appropriate the board of directors when they smell smoke. Here the general counsel can play an absolutely critical role. Because in most firms the general counsel is highly regarded and has access to the chairman and the board, the general counsel has the opportunity to emphasize areas of concern.

In my experience, often risk control personnel smell smoke early but they do not have the position within the company and are by no means encouraged to take the career-threatening step at times to walk into a senior office and express their views with sufficient force.

My own sense is that the level of the senior risk manager in too many companies is not sufficiently high so that the kind of vigorous debate of major risk issues that is necessary actually takes place at the top of the house.

All of you as risk mitigators for this critical part of our economy have incredibly hard jobs to fulfill. You all over the years will have to tackle extraordinarily tough problems that will be crucial to the well being of your institutions.

However, knowing you as I do from my decades of work in this area, I am certain that you will continue to be world leaders in your tough but important job. Thank you for inviting me here to speak today.