'Rogue' trading is actually business as usual in world of investment banking

PUBLISHED : Saturday, 24 September, 2011, 12:00am
UPDATED : Saturday, 24 September, 2011, 12:00am

Once again, news media have had a field day with the discovery of yet another 'rogue trader', this time one who cost his Swiss employer US$2.3 billion in allegedly fraudulent losses since 2008.

It's a great story, especially since the alleged rogue, Kweku Adoboli, was praying on his Facebook page for a miracle more than a week before UBS realised that a large pot of its money had gone missing. However, the danger is that, in highlighting the fascinating details, we miss the main plot, which has immense implications not merely for the bankers and their bonuses but also for the economy and societies as a whole.

Who are the real rogues? Are they the traders who conduct the deals or the banks whose procedures are so sloppy that such huge sums slip through the cracks? Barry Ritholtz wrote in his Big Picture blog: 'There are no rogue traders - just as there are no predatory borrowers - there are only rogue banks.'

That may be pushing things, since individuals have a responsibility for their actions. But Ritholtz's main point is valid - that if you are the chief executive or manager of a business using leveraged capital to speculate, you must understand that some of your employees are not competent and must have systems in place to separate the qualified from the unqualified, to establish trading limitations, leverage constraints, risk parameters, ensure that traders stay within their money lines, maximum drawdowns and loss limits, that capital is properly employed and managed, that IT systems can track what is happening.

'A rogue trader with massive losses is a sign of complete and utter failure by the bank's management,' he declared. That someone could run up and hide losses for three years and not be discovered should lead to top managers being sacked, if not placed in the dock, and the institution closed down.

The last few years have seen a pattern of management failure, which would in some strange aspects have been hilarious except for the fact that the failures almost brought the global financial system to its knees. Alan 'Ace' Greenberg, the so-called 'legendary gazillionaire CEO' of Bear Stearns, told staff that they would only get one box of paper clips at the start of their career to encourage recycling and saving money - yet the company's mortgage division lost hundreds of billions of dollars on financial derivatives. The president of AIG's financial products operations called derivative underwriting 'free money'.

What has this got to do with the economy, or you and me? These are banks, and thus protected by taxpayers' money. Their continuing failure to control risks should reinforce the arguments of Paul Volcker, probably the greatest head of the US Federal Reserve, and last week by the British Independent Commission on Banking, that traditional retail banking should be ring-fenced from risky investment banking.

Martin Wolf, a member of that British committee, wrote that: 'I could not have asked for a better illustration of the unregulatable risks to which investment banks are exposed than [last week's] announcement of a loss of US$2 billion in 'unauthorised trading'. No sane country can allow taxpayers to stand behind such risks.' Thomas Hoenig, a governor of the US Fed, described banking as being 'more akin to public utilities'.

It is high time for governments everywhere to take the advice: protect the plain-vanilla retail banking and the savings of ordinary depositors; let the investment bankers gamble with their own money without bank licences or protection of taxpayers' funds.

There is a wider point about the sickness of modern, so-called Western capitalism. Matt Taibbi in Rolling Stone touched on it in an excoriating attack on investment bankers, whom he called 'professional gamblers'.

'The influx of i-banking types into the once-boring worlds of commercial bank accounts, home mortgages and consumer credit has helped turn every part of the financial universe into a casino. That's why I can't stand the term 'rogue trader', which is always tossed out there when some investment banker loses a billion dollars betting with someone else's money. They're not 'rogue' for the simple reason that making insanely irresponsible decisions with other peoples' money is exactly the job description of a lot of people on Wall Street,' he wrote.

It is an indictment of Western capitalism that investment banking is still a magnet for the best and brightest graduates. Adoboli was paid 10 times the average British wage, before bonus.

To give an idea of the power of high-frequency trading programmes which investment bankers employ, if supermarkets had access to them, the average household could complete its shopping for a lifetime in less than a second. That is the present generation, with trade execution in 10 microseconds, or 40,000 trades in the blink of an eye, but the new frontier is nanoseconds.

But what is it all for? It does not create jobs for the masses or a single widget or put food on the table. A belated reassertion of government protection for commercial banking, including home mortgages, which the investment bankers messed up, but not for speculative investment banking, might establish the principle that money is a dangerously damaging god for a civilised society.

Kevin Rafferty was editor of independent daily newspapers published during IMF and World Bank annual meetings



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