Have banks really learned from the 2008-09 global financial crisis? A London-based trader on UBS AG's exchange-traded-fund desk was arrested early Thursday, September 15, for alleged rogue trading, which could cost the bank upwards of US$2 billion in losses.
Thirty-one-year-old Kweku Adoboli was picked up after UBS discovered the huge loss late Wednesday. The trader has been authorised to work in the securities business since March 2006. The operation, under the equities division, was known internally as a profitable – and risk-free – area of business.
The new shock comes three years after UBS' investment bank had to write down US$50 billion in securities trades, prompting internal reforms aimed at preventing a similar occurence. Like the world's other large banks, UBS said it would strengthen its risk management system and oversight of trading and other activities.
The loss marks a major setback in the bank's efforts to restore its reputation after it became one of the biggest continental European casualties of the 2008 banking crisis. It also raises questions about the supposed reforms carried out by other banks.
The Wall Street Journal says UBS generally has been cautious about taking on too much risk since its troubles and has said it has moved away from proprietary trading, raising further questions among bankers as to how a single trader could generate such a large loss.
According to the UK's Guardian newspaper, rogue trading incidents in the financial markets are not new. Nick Leeson is perhaps the highest profile after he was jailed in Singapore for bringing down Barings Bank in 1995 but there have been many others, including Yasuo "Mr Copper" Hamanaka and Jérôme Kerviel, a trader at Société Générale, whom the French authorities sentenced to three years in prison last year after he ran up losses of €4.9 billion.
But the reforms and restructuring banks put in place after the recent global financial crisis were supposed to make risky trading more difficult to carry out. It remains unclear at this point exactly how Adoboli got exposed to such a massive position. It is thought that the Swiss central bank's intervention in the rise of the Swiss franc may have something to do with it.
What is clear is that there was a failure of oversight and controls. News of the UBS loss came days after the government of Prime Minister David Cameron promised to endorse proposals by the Independent Commission on Banking to ringfence 'bread-and-butter' commercial and retail banking from investment banking. Those ideas are now expected to find a more sympathetic hearing in London and other financial capitals.
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