Bad day at the office

UBS trader Adoboli held over $2bn loss
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The revelation that a trader in “Delta One” – an area of derivative trading activity that is one of the only remaining ways for banks to take big bets with their own money – could cause such a catastrophic loss has prompted calls for fresh restrictions on investment banks.

“Management doesn’t understand what’s going on in the Delta One desks,” said Terry Smith, chief executive of Tullett Prebon, the interdealer broker. “If you sat down with a CEO and asked them to please explain what happens they would try but they couldn’t give you an accurate answer because they don’t understand.”

Analysts at Goldman Sachs said the trading losses were a reason to “sharply scale back” investment banking at UBS.

“The key area of damage in our view is reputational and extends beyond the investment bank, into UBS’s private banking business,” the Wall Street bank said in a note to clients.

Analysts had forecast net profits of about SFr1.3bn ($1.5bn) for the quarter, but are now revising their outlook. UBS shares, down nearly 85 per cent in the past five years, fell 10.8 per cent to close at SFr9.75 in Zurich.

UBS’ investment banking division has only just begun to recover from near-disastrous losses during the financial crisis. Some stability has returned at the unit under Carsten Kengeter, the former Goldman Sachs executive who joined in 2009.

The bank’s last annual report said that “increased risk taking” had been authorised since 2010 “for incremental trading activity.”

How does this sort of thing happen? How can a 31-year old non-fiduciary expose a company to $2 billion in risk? Presumably the amount he could put in play was capped: $10 million, $20 million(?). Do derivatives carry that much leverage, or was he given just ridiculous amounts of money to play with? Even rinky-dink local governments and professional service firms nab employees for petty pilferage but the cream of international finance can't keep a leash on their traders.

These are the the institutions it's our patriotic duty to bail out, by the way. The rich are no longer allowed to become poor.

New tag: OPM (Other People's Money)


Visibilium said…
They're considered low-risk trades, which is why they're flying under radar. Same with SoGen.
That's a pretty high low-risk.
Visibilium said…
Yeah, cumulative effects may pile up under inadequate supervision. The high risk stuff is watched more closely. Anyway, it's high time that UBS's leadership got the boot. The only problem Swiss banks are the big ones. That became very apparent in 2008, and the same types of clowns have still been holding the top jobs.