There are some shoes you just don’t want to walk in. The husband who gets caught, pants down, cheating on his wife. The politician accidentally exposing himself on social media. The investment banker who loses $2 billion in unauthorised trading.
Yesterday, UBS announced in a statement that it had “discovered a loss due to unauthorised trading by a trader in its investment bank [later identified in the media as Kweku Adoboli, a director in the bank’s delta-one desk in London]. The matter is still being investigated, but UBS’s current estimate of the loss on the trades is in the range of $2 billion. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.”
News spread fast — mostly through emails with subject lines such as “Holy $#*%!!”. (How come my spam blocked an important work email yesterday, but didn’t block several expletive-laden emails?)
Of course, these were followed with more sober questions, the most oft repeated was a version of this: “How could UBS let this happen after all that’s been set up to avoid such losses?”
While rivals can crow, this doesn’t bode well for the integrated banking model at any bank, because pundits are increasingly calling to separate retail businesses from investment banking to protect depositors from just such risk. The UBS trading gaffe supports the critics.
And although UBS can likely withstand the hit, it’s not good PR for its risk management skills or its overall health. In August, the bank said it would fire 3,500 people (about 5% of its workforce) to save SFr2 billion, mainly at its investment bank. The rationale was the double whammy of weaker earnings thanks to the debt crisis in Europe and the US, and tougher regulations, which force banks to hold more capital to protect themselves from future financial crises. In 2008, like many other multinationals, it had to be rescued by the Swiss government after losses on toxic assets held by the investment bank. This is just another drama it doesn’t need.
But what about that trader? It appears as if he didn’t tell his boss. This is just a guess, but given that Adoboli was arrested at 3.30am in central London on September 15 on “suspicion of fraud by abuse of position”, it’s doubtful the guy told his boss. But perhaps he should have.
In a serendipitous press release issued by recruiting agency Robert Half yesterday, the firm noted: “Most of us do not bother to tell our bosses about the minor glitches that are part of the average workday. But every now and then, something happens that the boss just has to know about, for example, a major mistake or a missed deadline.”
Or a loss of $2 billion.
The agency added: “While you may be tempted to conceal the problem until it blows over or gets resolved, it is better to be direct.” This lesson is also well-told in Rogue Trader, a flick about ambitious, wide-boy Nick Leeson, whose futures trading losses in Singapore totalled $1.4 billion and prompted the collapse of Barings, one of Britain’s oldest investment banks.
The first piece of how-to-break-bad-news advice given by Robert Half is to “deliver the message yourself”. He added: “If possible, arrange a face-to-face meeting to explain what has happened.”
Do you think? Imagine the email.
Message: I am writing to inform you of a minor trading glitch that took place today...
That just wouldn’t cut it. But it would be easier.
Robert Half then goes on to advise: “Do offer solutions.” That one might be tough for this trader. Double down? Seems likely the person already gambled rather heavily.
The final bit of advice: “Do be honest ... Be upfront about the scope of the situation, especially when the best solution will be costly in terms of time or money. It is never a good idea to downplay the seriousness of a problem or withhold information in the hope that the boss will be less upset.”
While Robert Half’s advice might have been late for the trader, it isn’t for UBS. The public, as shareholders, are UBS’s bosses. The bank will need to be up-front and honest about the scope of the situation to avoid angering them further.
Of course, the public should also be used to this by now. For despite endless new regulations, rogue traders persist. The biggest loss unfolded in 2008 when Societe Generale, France’s second-largest bank, revealed that Jerome Kerviel had lost the bank €4.9 billion ($6.7 billion) through a scheme of unauthorised trades. Kerviel was convicted in October 2010 on charges of forgery, breach of trust and unauthorised computer use for covering up bets worth nearly €50 billion between late 2007 and early 2008.
In 2010, a former senior trader at Merrill Lynch in London, Alexis Stenfors, was banned from trading for at least five years for mis-stating his positions by more than $100 million in 2009. The bank made a $456 million write-down. Stenfors was banned on the grounds that he was “not a fit and proper person”, which frankly seems a bit judgmental. Who is to say who is proper? Just say he lied.
In our neck of the woods, some will remember the losses racked up by Japanese trading house Sumitomo Corp. In the summer of 1996, Sumitomo reported a loss of $1.8 billion in unauthorised copper trading by Yasuo Hamanaka on the London Metal Exchange. Hamanaka had been nicknamed “Mr 5%” because his trading team was said to control 5% of the world’s copper trading. Others called him “Mr Copper” because of his aggressive trading style. And some others simply called him a cellmate — he was sentenced to eight years in prison in 1998 and was released in July 2005, one year early.
Perhaps the most bizarre rogue trading story is that of Peter Young, a fund manager at Morgan Grenfell Asset Management, trading for three large European funds seeking international exposure. Young racked up losses of $700 million trading equities and was charged for conspiracy to defraud investors. The father of three showed up at the trial in skirts and high heels. Some were initially sceptical of the cross-dressing, claiming it a stunt. But he was found unfit to stand trial after he tried to castrate himself to fulfil his “passion” to become a woman.