Friday, 16 September 2011

Oh no; Not again

Yet another rogue trader has emerged. This morning is ablaze with the news that UBS (a Swiss bank) could have lost some $2bn on account of the actions of one trader - Kweku Adoboli at its London office. Adoboli has been arrested last night and the details are only slowly emerging.  Nothing is proven as yet , but Adoboli might very well join his illustrious predecessors - Nick Leeson of Barings, Jerome Kerviel of Societe Generale, et al in the hall of Notoriety.

Apparently the losses stemmed from the trader placing bets, using the banks'own money on something called Delta One - trading in financial instruments linked to exchange traded funds. To lose $2bn, the trader must have been trading staggering sums of money. Clearly UBS has egg on its face. Quite apart from the massive loss, questions will be asked about risk management in the bank. How could they let such a big loss build up.

The question to be asked is what on earth banks are doing even indulging in such activities. They are cloaked under the respectable heading of "investment banking", but this is nothing other than pure gambling. Is this what banks should be doing - gambling in esoteric instruments that nobody else would even understand ? Banks think that they can build big risk management systems, but the truth is that traders are incredibly bright and frighteningly sharp and they will  find a way to beat the best of control systems. After all, traders often hold their managers and risk departments in utter contempt and consider it almost a rite of passage to hoodwink them.

The fig leaf that this is all somehow a very respectable activity couched in terminology such as risk management, investment diversification, hedging, providing liquidity and such other gobbledygook must be once and for all removed. Banks, if they wish to indulge in such activities, should label these departments as "Pure unadulterated gambling department", "Better than a Las Vegas casino department", "" The Wild Wild West",  "Punters Inc",   "Rogues' Lounge" , etc etc.

Plain English helps. Free drinks served by scantily clad waitresses roaming up and down the aisle is optional.

And bankers wonder why they are unloved by the public.


gils said... comes the master :D engada konja naala bijinej related posts kanumay paathen :D

Deepa said...

You definitely ripped off the fig leaf. For an average Jane like me, they make it sound like 'Trading' is an intergral and pretty legit part of Investment Banking.

Having read your blogs for a period of time now, I understand your arguement in favour investing in a company based on its basics and really building equity over a period of time, instead of puntering and making quick bucks.

So what you are saying is, an "Investment Bank" should actually be doing the former, rather than turning into a large scale stock-broker, to really justify that heavy title. Right?

Ramesh said...

@gils - What do do ?? Have to earn daily bread :):)

@Deepa - Unfortunately that's an archaic view only espoused by the likes of Warren Buffet. The culture of incredible bonuses encourages get rich quick mania and gambling in banking has become very respectable. However one of the great dictums of life is that money is sweet only when you slog to earn it. A windfall is the worst curse that can happen - contrary to what we might think, most lottery winners fare miserably in their lives later on.

Vishal said...

Well, I must confess like I have said always, this blog of yours is enough to understand the very nuances of business, ecomony, ethics and governance. Just too good! Ramesh!

Risk management seems too heavy of a word which has seldom been deciphered in true spirit. Amidst supposedly strongest of internal controls, issues such as this also exist and makes a sorry reading for investors.

Appu said...

Basically no system is fool proof. All systems will have loop holes and could be broken down. It also tells most of the time the managers never know the ground reality!

Regarding punting and quick bucks, I think those things and people should do exist!
In a food chain, you need Lion as well as a rabbit. If there are no punters who do daily trade where is the sustainability? If the punter is not there where is the value and respect for a long time investor? Similarly in this financial chain you need punters. three cheers to those who risk (theirs) or others money day in day out :)

Ramesh said...

@Vishal - One interesting aspect of risk management - be very wary of anything that makes too much profit !

@zeno - For once I slightly disagree. Punters and gamblers, there will always be, but I shall continuie to view them with disdain.

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