September 15th, 2011
07:37 PM GMT
Editor's note: David Buik is a veteran commentator and partner at BGC Partners.
London (CNN) - How ironic that it should be exactly three years to the day that Hank Paulson, then the U.S. Treasury Secretary, allowed Lehman Brothers to go to the wall, that an unauthorised loss of $2 billion from UBS’s investment banking operation in London should have been announced by CEO Oswald Grübel.
Paulson’s decision was inexplicable in the circumstances, having saved Bear Stearns and supported AIG, and it sent seismic tremors of fear through financial markets not seen since 1929. UBS’s loss has at least been declared, though the reason behind the alleged behaviour of 31-year-old Kweku Adoboli may take some weeks to manifest itself.
What is astonishing to all of us is that since the banking crisis of 2008, regulatory controls have been tightened up immeasurably, and credit managers are virtually the most important appointee in a financial institution. However the old adage of “where’s there’s a will there’s a way” still prevails, and if a rogue trader wants to go under the radar, sadly it still seems to be an insurmountable problem. UBS has had copious chairmen and CEOs leading up to and after the banking crisis. Billions of dollars in losses have been declared on sub-prime lending and other derivatives and the banks has faced a serious spat with the U.S. Department of Justice over the tax issues of some of its clients.
In 2009 Oswald Grübel was appointed CEO, having built a superb reputation running Credit Suisse’s global operations until his retirement. Slowly but surely he rebuilt UBS’s reputation and investors’ trust in the bank. Largely speaking the bank had returned to profitability in the past two years.
This trading loss will have rocked the management and employees back on their heels. The world of banking has such respect for Mr Grübel. It will be devastating for him. His personal integrity is secure. But the losses inevitably beg the question – how was this allowed to happen?
Ever since Nick Leeson’s escapades in the financial futures markets in Singapore took Baring Brothers down to the tune of £800 million back in 1992, psychiatrists, doctors, financial analysts and observers have tried to understand why rogue traders attack markets so irresponsibly, with such gusto and bravado, and without any concern about the damage they do to the institution they work for or their colleagues.
I suppose they just don’t care. There is always an element of the punter in most traders. Though the intellect of traders today and their access to program trading is vastly superior to 25 years ago, there is still very real evidence of the idiosyncratic nature of a gambler. An excess of testosterone is also in liberal supply. Women are very unlikely to behave so irresponsibly.
Three years ago Societe Generale's Jerome Kerviel incurred unauthorised losses in excess of $5 billion, trading equity indices. Who knows what was going through his mind? Recklessness resulting in him doubling his position; envy and jealousy for being remunerated inadequately; revenge against the management. Who knows?
It is a sad day for UBS and for London, but hopefully the reputational damage will be temporary. Finally let's not forget speculation as to what happened, rather than fact, is running wild.
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