UBS rogue trader: why do they only seem to come with losses and not profits?

15th September 2011

UBS losses, the London Evening Standard predicts could "prove to be the catalyst for the Swiss regulator to close down the loss-making, gaffe-prone investment bank".

The bank, it notes, totted up $60 billion of losses during the sub-prime crisis in 2008, which in turn angered the Swiss public and triggered an identity crisis of existential proportions.

A man has been arrested on suspicion of fraud, and is currently being questioned by police.

UBS's chief executive said the loss does not affect the fundamental strength of the bank even though it will lead the bank to report a third quarter loss in 2011.

But that probably won't be much comfort to investors: since 2007 UBS has changed its chief executive three times as well as shutting down its proprietary trading arm.

The level of anger towards UBS in Switzerland was on a par with the hatred felt towards UK bankers and their outsized bonuses. But it was worse – it was tinged with the humiliation of one of the most respected, discreet banking systems in the world being brought into disrepute. 

In the Evening Standard writer Nick Goodway asks how it could happen again?

The future of the investment banking giant UBS in London hung in the balance today after it revealed that a single rogue trader had run up losses of $2 billion.

UBS warned that this was likely to push it into the red in the third quarter and comes at time when the Swiss bank is axing thousands of jobs in a bid to slash costs. It currently employs 6800 staff in London.

The bank called the City of London Police to its head office beside Liverpool Street station in the early hours of this morning. A 31-year-old man was arrested on suspicion of fraud by abuse of position. He was being held in police custody.

The UBS announcement came as complete shock even to most of its own employees who first saw it flash up on their trading screens.

A loss of $2 billion would make this the single largest incidence of rogue trading in London. Jérôme Kerviel lost €4.9 billion taking huge bets on European stock markets at Société Générale's Paris headquarters in 2008.

UBS top management is now likely to come under huge pressure from both the London and Swiss authorities. Some people have even suggested that the Swiss National Bank could order UBS to close its investment banking arm rather than put its massive domestic banking business at any further risk.

Analysts today said UBS could survive the scale of the losses but that its reputation had been left in tatters. Fiona Swaffield, an analyst at RBC, said the bank had been seen as having recovered from the credit crisis and to have improved its risk management but added: "This brings that very much into question."

Kerviel's detection and arrest eventually led to the departure of SocGen's chief executive, Daniel Bouton, the bank's head of risk and a raft of senior managers in its investment banking division within 12 months.

UBS chief executive Oswald Grübel sent an apologetic email to all staff today. Until today he had been seen as a strong boss of the bank, having  started to rehabilitate its after it lost $50 billion during the 2008 financial crisis. He ordered 3,500 global job cuts last month.

His future is now uncertain, as too is that of Carsten Kengeter, the head of investment banking.

Analysts had been expecting UBS to make a third quarter profit of Swfr1.3 billion which could all be wiped out by the rogue trader's losses.

A former director of risk at UBS said: "I'm staggered by this. When I was at UBS, it was extraordinarily difficult for a trader to trade non-vanilla transactions. Two things shock me: one, the size, and two, that nobody else knew. When the Barings rogue trade happened, there were rumours in the market that things weren't quite right. This time, there's been silence. It seems strange that someone could rack up a deal so large it creates a $2 billion loss. There's always a counterparty, someone must have seen and known about it outside the bank."

Chief's email bids to ease fears of his staff

In a desperate attempt to reassure his thousands of staff in London and around the world, UBS chief executive Oswald Grübel sent an email to all staff this morning.

It read: "We understand that you have already had to contend with unfavourable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm. We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times.

"We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank's management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened. We will keep you updated on the progress of our investigation."

But employees were unimpressed. recruitment consultants reported a rush of inquiries from traders seeking an exit.

Early feedback suggests UBS staff in London only found about the unauthorised trade when the ‘red sticker’ went up on Bloomberg. The size of the loss suggests that UBS either has a Kerviel on its hands or a leveraged FX trade has blown up.

Mindful Money blogger Shuan Richards said

"Here is the headline from Reuters:

'UBS says a trader of investment bank has casued loss estimated at $2 bln'

This gave me two initial thoughts. The first was that rogue trades only seem to come with losses and not profits! Odd that is it not?In case you had any doubt rogue profits do happen followed by a rush of stamping feet by those anxious to take the credit! The relationship could not be more asymmetric. Also it confirms my view on bank stresses as these things tend to happen at such times or to be more specific we tend to be told about them in these times as otherwise they would be hidden.

What was it?

Now I rush to say I do not know in spite of it being a former employee of UBS. However if we look at the size and timing of this then it looks possible that UBS was long the Swiss Franc when the Swiss National Bank devalued and established a currency floor at Euro 1.20. Whilst you mull over the irony of the SNB hurting UBS (The Swiss taxpayer who has already bailed out UBS once might have other words to describe this…..)  let me give you a few more thoughts.

In my experience a large loss is usually accompanied by “somebody clever” coming up with a fix and in my experience this invariably makes the loss worse. This would explain why there has been a delay between the devaluation and this loss being announced now. Of course no-one will officially admit to this. Also under pressure individuals tend to hide such things as best they can even what you would consider to be “nice upstanding individuals”, before the event anyway. I have worked with someone who under pressure put his loss-making deals in his bottom draw and kept them quiet. Of course he was soon
found out and for the bank there is the issue of what to do next which in general is to keep it quiet if they can. If there is a theme in this it is that the pressure that markets can put on an individual’s personality can be extreme and sadly some do break under it. This is rarely reported for obvious reasons but there you are and I can assure you that if you are a witness to it the questions it raises are difficult to fully answer.

As I have touched on a grim subject I am in need of a good laugh and fortunately someone in a comment on the FT website has provided me ( and hopefully you) with it. This is from the UBS Risk Management brochure."

More:

Plenty of white collar crime, but where are the “Criminals?”

This whole report is a missed opportunity

Reform – is that an order or a request

Online dragon Julie Meyer on the 'real' issue facing the economy

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