UBS $2 billion rogue trade suspect held in London

[Magda Hassan]

UBS $2 billion rogue trade suspect held in London




Breakingviews: Rogue trader hits UBS investment bank (04:41)


By Victoria Howley and Emma Thomasson
LONDON/ZURICH | Thu Sep 15, 2011 2:34pm BST

(Reuters) - Swiss bank UBS said a trader had lost it around $2 billion (1.26 billion pounds) in unauthorised deals, and police in London arrested 31-year-old Kweku Adoboli in connection with the case.
Adoboli -- a director of exchange traded funds and "Delta 1" working in the bank's London office, according to his profile on networking site LinkedIn -- was arrested on suspicion of fraud, sources told Reuters.
"I can confirm that an employee of the bank was arrested in London in connection with the statement," a UBS spokesman said.
UBS said it might post a third-quarter loss after the rogue trades, a huge blow as it struggles to rebuild its credibility after years of crises.
The loss effectively cancels out the 2 billion-franc (1.5 billion-pound) saving that the bank had hoped to make in a cost-cutting programme announced last month in which it will axe 3,500 jobs.
It also threatens the future of UBS's investment bank, which is being reviewed by chief executive Oswald Gruebel as part of a wide-ranging restructuring following heavy losses in the credit crisis and a damaging scandal over bankers helping rich U.S. clients dodge taxes.
UBS, which said no client positions were affected, is scheduled to hold an investor day on November 17 at which it was expected to announce major restructuring of the investment bank.
"The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion," the bank said in a statement.
UBS employed almost 18,000 people in its investment bank at the end of June, most of them outside Switzerland, particularly in London and the United States.
UBS shares were down 9.1 percent at 9.935 Swiss francs at 2:20 p.m. British time, while the European banking sector was up 4.78 percent.
"(This) is a staggering demonstration that all the clever systems that the banks now have, especially after the financial crisis, still cannot stop a determined individual getting round them if they want to," said Chris Roebuck, Visiting Professor at Cass Business School in London.
"It will yet again confirm to the majority of shareholders who are Swiss that investment banking is not 'proper' banking, as private banking is."
UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches followed by repeated pledges to fix risk systems.
KERVIEL
Any losses in its investment bank risk scaring UBS's rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world's biggest wealth manager but has slipped to third place.
"This loss has the scope to have a material impact on the perception of UBS's private bank, impacting its future operating trends," Goldman Sachs analysts Jernei Omahen and Peter Skoog said in a note.
"Today's announcement therefore adds to the long list of arguments (and pressure) for a substantially smaller investment bank."
UBS's news caused disbelief among market operators.
The last similar case was when Jerome Kerviel, then a trader at Societe Generale, racked up a $6.7 billion loss in unauthorised deals revealed in 2008. Kerviel was sentenced to three years in prison in October 2010.
Both Kerviel and Adoboli were the same age when the scandal broke and both worked with so-called Delta 1 products, derivatives which closely track the underlying securities and give the holder an easy way to gain exposure to several asset classes. Examples include equity swaps, forwards, futures and exchange-traded funds.
"It is amazing that this is still possible," said ZKB trading analyst Claude Zehnder. "They obviously have a problem with risk management. Even when the amount isn't so high, it is once more a loss of confidence that casts UBS in a poor light."
"With this they are losing a lot of credit that they had regained with effort," he added.
Switzerland's financial markets regulator FINMA said it had been informed of the case and was in close contact with UBS.
HEADS TO ROLL?
The bank has in the past two years tried to rebuild the investment bank that nearly felled it during the financial crisis. It needed a state bailout after heavy losses on U.S. subprime mortgage-related securities.
Under Gruebel and investment bank boss Carsten Kengeter -- themselves both once traders -- it hired hundreds of traders in a bid to boost its bond business.
Several analysts said the incident made it more likely Kengeter would be in the firing line, while Gruebel could step down sooner rather than later.
"Gruebel saved the bank from destruction, so his main job is done. It is only a matter of time before he steps down. If it means he leaves a little sooner, it does not change a lot. But the investment bank is a bit of a disaster, and the knives will be out for Kengeter," said Peter Thorne, analyst at Helvea.
Another analyst who declined to be named said: "Some important heads are going to have to roll, and some are saying that after a series of missteps with the IB, Kengeter himself will have to go."
Former Bundesbank head Axel Weber is due to join the UBS board in May and take over as chairman in 2013.
The weak performance of the investment bank and tough capital rules in Switzerland had already attracted intense scrutiny over how UBS will cope, with analysts calling for a retrenchment of the investment bank.
The rogue trader scandal came as Swiss politicians were debating tough new capital rules designed to make sure big banks can weather future crises without having to be bailed out by the state.
"It shows that investment banking is a risky business and that it is important that systemically relevant functions are clearly separated from the rest of the banking business," Caspar Baader, parliamentary leader of the right-wing Swiss People's Party, told Swiss television.
http://uk.reuters.com/article/2011/09/15...7920110915

[Jan Klimkowski]

Fixed the headline:

UBS $2 billion perfect patsy held in London

Here's some more of the official story as channelled through the Guardian:

A 31-year old man Kweku Adoboli has been arrested by City of London Police on suspicion of fraud in connection with an alleged rogue trading incident that has cost Swiss bank UBS around $2bn (£1.3bn).

The Zurich-based bank uncovered the incident in the past 24 hours. Shares in UBS plunged nearly 10% after it revealed the loss, which could push the bank into the red for the current financial quarter.

The City of London Police confirmed they had arrested a 31-year old man at 3.30am in central London on "suspicion of fraud by abuse of position". The police did not identify the individual who remains in custody, but sources say he is Adoboli. The force has begun an investigation.

The Financial Services Authority, the City regulator, is understood to have been informed. People wanting to work in the City often need to be registered with the FSA, and Adoboli's entry shows he has been on the FSA's register since 2006 at UBS.

The bank would not comment but Adoboli is understood to work in its equity division and on a trading desk called Delta One that was involved with its exchange traded funds (ETF) business. ETFs are complex financial instruments that comprise a basket of investments intended to mimic a market's movements while Delta One traders try to make huge profits on tiny differences between prices.

The Serious Fraud Office may yet become involved after it said it was "seeking discussions" with the bank, the City of London Police and the FSA about how to proceed if fraud needed to be investigated. The SFO had already issued a warning about the "inherent dangers" of ETFs because of their complexity.

It is understood that the entire trading desk, including Adoboli's supervisor John Hughes, has been sent home while the investigation continues.

Louise Cooper, analyst at BGC Partners, said the losses are rumoured to relate to a Swiss franc trade that went wrong after the Swiss National Bank intervened to lower the currency. On 6 September, SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 equivalent to SFr1.20 to the euro.

"The Swiss currency moved by 8% straight away which is a huge move for FX [foreign exchange] markets. Probably a good guess as to where the loss came from, but at the moment we do not know," she said.

It was not clear, though, whether this was the explanation for what might have gone wrong and UBS did not deviate from a brief statement in which it said it was still trying to get to the bottom of the matter.

On the third anniversary of the collapse of Lehman Brothers, the Swiss bank said: "UBS has discovered a loss due to unauthorised trading by a trader in its investment bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn. It is possible that this could lead UBS to report a loss for the third quarter of 2011."

It added that "no client positions were affected".

I note that the fingered "rogue trader" is a black man.

I also note that the story is related the revaluation of the Swiss Franc. That event is covered in post #586 here.

Note Denninger's comments there:

Swiss Central Bank Detonates FX Traders

In what may well be the single largest one-day move in the FX markets ever (I can't find a larger one among "major" currencies with material representation in FX) the Swiss National Bank decided to "peg" (via printing) the CHF to 1.2 Euro.

The result was an essentially-instantaneous move in the CHF against everything of almost 10%.

(Chart at url)

For the uninitiated FX trades are often done with rather extreme amounts of leverage. This sort of move has a very high probability of utterly destroying many traders - anyone on the wrong side of it, basically.

So, UBS was caught highly exposed and highly levered when the Swiss National Bank decided to revalue their currency by 10%.

$2 billion pissed away on the roulette table.

The corporate suits have a brainwave: Gee let's blame a rogue trader.....

[Jan Klimkowski]

Denninger asks a good question in his commentary on this matter today:

A 9% move in seconds in FX is virtually guaranteed to detonate someone, simply because of the leverage in those instruments - it's monstrous (frequently 50 or even 100:1) and 9% moves of this sort are unprecedented in allegedly "stable" currency crosses. You see that sort of thing in nations like Vietnam when they devalue against a peg - not "mainstream" currencies like the Swissy.

But this begs another question: How is it that we never seem to hear about "unauthorized" trades that make banks money?

In other words, why is it that I'm left with this uncomfortable feeling that these institutions only call the cops (in this case) or the media and PR department (in most cases) to call something "unauthorized" when the bets their people make turn out poorly - yet they're more than happy to pat the guy on the back and hand him a fat bonus when it works out well?

[Magda Hassan]

Good questions indeed Karl!

[Ed Jewett]

The $2 Billion UBS Incident: Rogue Trader' My Ass

Catherine, News & Commentary on September 15, 2011 at 2:09 pm · No Comments





By Matt Taibbi
The only thing that differentiates a "rogue" trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG's Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn't an investment banker, technically but he was in financial services).
In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.
In other words, "rogue traders" are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.
Continue reading the article . . .