Over $2 Billion Lost in Unauthorised Trades at UBS. Will Banking Reform Stamp out the Rogue Dealers?

Since the news broke last month about UBS losing over $2 billion in ‘unauthorised’ trades, much has been written on the subject of so-called ‘Rogue Bankers’. Many financial commentators and analysts are saying that here is more proof, as if we needed any more, that there is a greater need than ever for banking reform, such as  the new rules decreed by Basel III in Europe and Dodd-Frank in the US.

I wouldn’t disagree with those comments, but doesn’t it beggar belief, after all the scandals, collapses and bailouts of the last 16 years, that a massive, long-established and respected institution such as UBS can still allow such a thing to happen?

Powerful, experienced, senior bankers and traders may like to think of themselves as ‘Masters of the Universe’, but the label seems inappropriate for an employee like Kweku Adoboli, a 31 year old London-based dealer who started his banking career with UBS as a graduate trainee in 2006.  After just 5 years experience, surely there should still have been some careful supervision and monitoring of his work. 

The unauthorised deals apparently only came to light when he panicked and confessed to his boss what he had been up. How can a major bank allow a mind-boggling $2 billion to go AWOL, long after the Nick Leeson and Jerome Kerviel debacles?  Have no lessons been learned? Where were the checks? Where were the balances?  Did UBS have no systems in place capable of detecting the fraud? What were all their accountants, risk managers and controllers doing at the time?

When Dodd-Frank is fully implemented it is expected to have a limiting effect on any future rogue trading, thanks to the ‘Volcker Rule’ which prohibits proprietary or ‘casino’ dealing by banks except at the behest of its clients.  Basel III will ring-fence risky investment activity so that customers no longer bear the brunt of any future financial disasters.

All to the good; but nothing to do with the internal systems and supervision which should already be in place.  I see that UBS have just announced that they are anticipating a modest profit in the 3^rd quarter of 2011 in spite of the $2 billion loss.  Before the massive loss came to light UBS had already embarked on a cost-cutting program which will involve around 3,500 job losses.  Maybe they wouldn’t have to do that if they took more care of their customers' cash.  After the events of the last few weeks, I would be very unhappy right now if I were a UBS employee facing compulsory redundancy.