30 September 2011.
There have been many rogue traders in the course of financial history. Bernard “Bernie” Madoff operated the world’s largest Ponzi scheme and was sentenced to 150 years behind bars in June 2009. One would imagine that a recent precedent in Madoff would deter financial fraudsters from striking again, at least for a while. Apparently not.
The gigantic $2.3 billion losses that Union Bank of Switzerland is blaming on a Ghanaian-born “rogue” trader have added power to the elbows of all those who believe that “casino” banking ought to be completely separated from “utility” banking and should never be underwritten by the taxpayer.
UBS, whose City of London acquisitions have included the merchant bank SG Warburg and broker dealers Phillips & Drew, has yet to provide a credible excuse of what went wrong, though 31-year-old trader Kweku Adoboli has been charged with “dishonestly abusing” his position as a senior trader in the bank’s global synthetic equities division, with the intention of “making a gain for [himself], causing losses to UBS or to expose UBS to risk of loss." The Nottingham University-educated trader also stands accused of falsifying exchange-trade fund transactions dating back to 2008.
There have been reams of speculation about how the Swiss bank and/or Adoboli incurred these massive losses. There has also been some discussion as to whether the bank’s German-born chief executive Oswald Gruebel will be able to survive, and whether the bank will now be forced to pull out of investment banking altogether (this was, after all, the area in which the bank lost an astonishing €50bn during the subprime crisis).
Esteemed commentators including John Gapper of the Financial Times (A rogue trader at UBS or a rogue bank?) and Steve Randy Waldman of Interfluidity (Rogue traders and stated-income borrowers) have suggested that in its quest for ever-higher returns, and having learnt little from the disaster that nearly killed it in 2008, UBS has effectively became a “rogue company”. There are others who believe the Zurich-based bank is seeking to cover up its own inadequacies by throwing a convenient executive – a relatively junior trader who just happens to be of black-African descent – “under the bus”.
But the funniest and scariest article I’ve read about the UBS debacle is penned by Dominic Connor, a London-based head-hunter who specialises in the recruitment of “quants”. Connor earlier ran the IT department of Old Mutual’s fixed-income brokerage in the City of London, so he clearly knows a thing or two about the sociopathy of traders.
Related: Vickers Banking Reforms: Yay or Nay?
Writing in The Register, Connor painted a very plausible picture of what may have happened in UBS’s so-called ‘Delta One’ synthetic global equities unit in the City of London (Delta One units purport to trade on clients’ behalf but are known in the business as proprietary trading -- "prop trading" -- desks in disguise).
Connor suggests that Adoboli, if he was a “rogue” trader (and in Britain people are presumed innocent until proven guilty according to the law), had found ways of circumventing the bank’s back office systems. He writes:
"In every rogue case I know of, the trader was smart enough to bend the IT systems to his will… The Back Office Monkeys… don’t understand your strategy; if they did, they’d be in front office… Some of the smartest IT guys on the planet work in investment banks, but looking at the systems they use for risk and compliance you’d think their software had been developed in a joint venture between Capita and Accenture.”
“Traders are hostile to IT departments because they see them as black holes sucking money out of bonus pools and delivering little of any use any time soon. This is why front office want their own IT people."
Connor provides a disturbing picture of what goes on inside investment banks, including the hierarchical pecking orders that places risk managers at the very bottom of the heap. He said that any putative rogue trader who started in the back-office, as Adoboli did, effectively has the keys to the kingdom.
"Coming up through the ranks means you build contacts at all levels, and you gain yet more access rights because, in spite of the 237-page security procedure manuals, access and passwords are usually controlled by a mix of BOFHs and old hands who dish them out if they think you ought to have it. (Note: BOFHs are “bastard operators from hell”)”
“Let’s also be realistic: you’ve got a mediocre education, not much integrity and you’re on the make, take what you can get. An ideal gig is a high-volume desk because trades go wrong all the time and you will want to hide your strategy in among a good noisy crowd."
Connor's article really merits being read in full. It is absolultely hilarious. And terrifying.
"You expect to be caught in the first 24 hours. Every time the door to your office opens, or the phone rings, you think it will be somebody looking for answers. You live in fear.”
"If I had put my hand up at the end of the first year, I'd have received a slap on the wrist. By the end of the second, I'd have lost my job. By the end of the third, it had become criminal. I am a criminal, by the letter of the law, but there was no criminal intent there. You don't go into these things intending to become a criminal. You want to make money for the bank, be a good trader and get a big bonus. The criminality is always with the individual trader, but the bank, with its incompetence and negligence in controlling what is going on, is complicit.”
"I genuinely believed that the financial crisis of 2008 really would be the catalyst for everyone to put their house in order, but the opposite seems to be true," said Nick Leeson.
By Ian Fraser
Ian Fraser, a journalist since 1988, works on programmes about the banking and financial crisis for the BBC. He writes about business and finance for the Financial Times, the Sunday Times, the Independent on Sunday, the Daily Mail, and the Mail on Sunday. Since 2009, Fraser has been a visiting lecturer in financial journalism at the University of Stirling.
Charting the psychological journey of the UBS ‘rogue’ trader is republished with permission from the QFinance Blog.