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