Financial News

[southsider2k5]

Even managed a Nick Leeson mention.

 

http://www.latimes.com/business/la-fi-ubs-...0,6991492.story

 

Associated Press

 

September 15, 2011, 6:22 a.m.

 

Swiss banking giant UBS said Thursday that a rogue trader has caused it an estimated loss of $2 billion, stunning a beleaguered banking industry that has proven vulnerable to unauthorized trades.

 

Police in London said they arrested a 31-year-old UBS trader, Kweku Adoboli, in the alleged fraud. UBS declined to confirm his name.

 

Switzerland's largest bank warned that it could report a loss for the entire third quarter as a result of the rogue trade, while shares in UBS AG plummeted 8.7 percent to 9.98 francs ($11.41) on the Zurich exchange by early afternoon.

 

The case immediately evoked memories of Jerome Kerviel, the trader at French bank Societe Generale who secretly gambled away (euro) 4.9 billion ($6.7 billion). The scale of that fraud rocked the global financial industry and prompted banks to tighten oversight rules to ensure such large sums couldn't be traded unnoticed.

 

The Swiss banking regulator Finma said it was in contact with UBS about the incident, which was discovered late Wednesday.

 

"From the scale of this case you can be sure that it's the biggest we've ever seen for a Swiss bank," Finma spokesman Tobias Lux told The Associated Press.

 

UBS provided little specific information, saying the information was still under investigation and no client money was involved. The unauthorized transactions could cost UBS almost as much as the 2 billion Swiss francs ($2.28 billion) the bank said last month it hoped to save by cutting 3,500 jobs over two years.

 

It comes as UBS is struggling to restore its reputation after heavy subprime losses during the financial crisis that resulted in a government bailout, and an embarrassing U.S. tax evasion case that blew a hole in Switzerland's storied tradition of banking secrecy.

 

Adoboli's profile on the professional networking site LinkedIn showed he spent the past five years working at UBS's European Equity Trading division after three years as a trade support analyst for the bank. He graduated from England's University of Nottingham in 2003, where he studied computer science and management.

 

A public records search for Adoboli showed that he lives just off of London's Brick Lane, a busy street of curry houses, bars and vintage fashion shops only a few blocks from UBS's U.K. headquarters, which was cordoned off Thursday.

 

His profile picture on Facebook showed a black-and-white photograph of an African man in his early 30s, with interests including photography, cycling and boutique wines.

 

Banking observers immediately highlighted the similarities to the Kerviel case, which also involved a trader in his early thirties entrusted with responsibility for vast sums of money.

 

The debacle that befell Societe Generale, France's second-largest bank, resulted in Kerviel being convicted in October 2010 on charges of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly (euro) 50 billion ($68 billion) between late 2007 and early 2008. He was ordered to pay the bank back all the money he had lost and banned for life from working in the financial industry.

 

By coincidence, the Swiss parliament was slated to debate the future of the country's banking industry Thursday. Lawmakers are being asked to consider proposals to ensure that Switzerland's two biggest banks — UBS and Credit Suisse Group — are brought under tighter control as they are considered "too big to fail."

 

In a terse statement shortly before markets opened Thursday, UBS informed investors that "UBS has discovered a loss due to unauthorized trading by a trader in its investment bank."

 

"UBS's current estimate of the loss on the trades is in the range of $2 billion," it added. "It is possible that this could lead UBS to report a loss for the third quarter of 2011."

 

In a letter sent to its employees, the bank said it regretted that the incident came at a difficult time.

 

"While the news is distressing, it will not change the fundamental strength of our firm," the note said. "'`We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times."

 

It promised to keep employees briefed on developments in the case.

 

Peter Thorne, a London-based equities analyst at Helvea, said the loss was financially manageable for UBS, Switzerland's biggest bank. But he said it was a blow to the reputation of UBS and its management, and reinforced the case of slimming down the investment banking unit.

 

UBS chief executive Oswald Gruebel recently warned that the bank wouldn't achieve its aim for a pretax profit of 15 billion francs a year by 2014. UBS earned some 2.8 billion francs during the first half of the year, with the investment bank contributing 1.2 billion before tax.

 

UBS has been pressing to restore its reputation after suffering huge losses relating to toxic debts in the United States and needing a $60 billion bailout from the Swiss government.

 

In other trading debacles, Nick Leeson, a British trader working in Singapore for Barings Bank, made unauthorized futures trades that lost more than $1 billion and led to the venerable bank's collapse in 1995. The infamous case prompted banks worldwide to tighten their internal checks.

 

Leeson was released from a Singapore jail in 1998 for good behavior after serving 3 1 / 2years of a 6 1/2-year sentence. He claimed he did not make a cent from his disastrous trades but Barings' liquidators sought the return of 100 million pounds on any of his earnings relating to Barings.

 

————

 

Jordans contributed from Geneva. John Heilprin in Geneva, and Bob Barr, Greg Katz, Raphael G. Satter and Pan Pylas in London contributed to this report.

[NorthSideSox72]

Yikes.

 

It is amazing something at this level could still happen. Yes the rules and governance are confusing, yes there is huge motivation to make money no matter what. But large banks like UBS have internal rules and laws of governance that are basic stuff, and someone screwed up. Either other people knew about it and allowed it to happen, or there was an utter and catastrophic failure of compliance within the firm.

 

[southsider2k5]

Yikes.

 

It is amazing something at this level could still happen. Yes the rules and governance are confusing, yes there is huge motivation to make money no matter what. But large banks like UBS have internal rules and laws of governance that are basic stuff, and someone screwed up. Either other people knew about it and allowed it to happen, or there was an utter and catastrophic failure of compliance within the firm.

 

It amazed me how easy it would have been before 15c3-5 got passed. It still isn't that hard. Honestly it is easier at a big bank, because they have more rope to work with.

 

Though there is no doubt multiple people screwed up and will be justifiably fired.

[Balta1701]

Though there is no doubt multiple people screwed up and will be justifiably fired.

*Insert obligatory joke about them actually being promoted...awaits 2k5's response about how they're actually hired by the SEC.*

[southsider2k5]

*Insert obligatory joke about them actually being promoted...awaits 2k5's response about how they're actually hired by the SEC.*

 

Trust me, one thing that hasn't increased is my opinion of the SEC. There is a reason that people start there and go other places.

[NorthSideSox72]

It amazed me how easy it would have been before 15c3-5 got passed. It still isn't that hard. Honestly it is easier at a big bank, because they have more rope to work with.

 

Though there is no doubt multiple people screwed up and will be justifiably fired.

 

That is what I was really getting at. It is a lot harder nowadays to pull it off with few or no people knowing about it. There had to be other people who either knew about it, or were really bad at their jobs and missed it.

 

[Balta1701]

UBS only found out about the trades and losses because the trader came forwards himself.

[southsider2k5]

Wow, they really do it better in Europe, huh?

[Balta1701]

Consider this a question for the experts of not only how the trader pulled this off, but why the trader wouldn't actually hedge against the losses?

A major internal inquiry is under way at the Swiss bank's London office to understand how its control systems failed to pick up unauthorised trades by its "Delta One" trading desk as long ago as 2008.

 

Investigators are understood to be reaching the conclusion already that the fraudulent activity was almost identical to that discovered at French bank Societe Generale three years ago.

 

"This isn't just spookily similar to Soc Gen. It is exactly the same," said one source with knowledge of the situation.

 

It is thought a trader was able to circumvent UBS's risk-management systems by creating fictitious trades that made the bank's computer systems believe that the positions taken had been "hedged" to mitigate potential losses when in fact they had not been.

 

Senior managers across the City have been scrambling to double-check their own systems to make sure they could not have been tampered with in a similar way.

 

"It looks like real postions that were hedged with fictitious trades. These trades had forward settlement dates so they hadn't failed yet. Everyone is looking at their own controls in this area. Normally there are very strict rules around long settlement contracts," said one manager at a major investment bank.

 

The Financial Services Authority and the Swiss Financial Market Supervisory Authority have launched their own joint investigation into the trading losses at UBS. One of the "Big Four" accounting firms is expected to be hired to help the regulators with their enquiries.

 

The review will look at how such a large fraud was able to go undetected and will include a complete assessment of UBS's risk-management systems in its investment bank.

 

The serious failures already identified at UBS have led major credit agencies to warn that the bank's rating is under threat. Fitch Ratings, Moody's and Standard & Poor's have all put the bank on watch with a view to downgrading its credit rating.

Link. Worth noting that the article says this has happened before at a different facility but that it seems no one reacted to it happening before?

 

The cynical part of me thinks that there are traders in these institutions who do exactly this...make risky trades and then cover up the potential losses if things go bad...then both the company and the trader look the other way or make a fortune if everything goes well. Especially if this is something that has happened before at a different institution. I'd like to know why I should not listen to that cynical voice.

[Balta1701]

For those who think we need to solve the deficit now, here you go.

President Obama on Monday will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials.

 

With a special joint Congressional committee starting work to reach a bipartisan budget deal by late November, the proposal adds a new and populist feature to Mr. Obama’s effort to raise the political pressure on Republicans to agree to higher revenues from the wealthy in return for Democrats’ support of future cuts from Medicare and Medicaid.

 

Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.

 

Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday.

 

Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments.

 

In a speech on Thursday, Speaker John A. Boehner, Republican of Ohio, agreed with Mr. Obama that the deficit-reduction committee “can tackle tax reform, and it should,” to get rid of many tax breaks and allow for lower marginal rates.

 

“Tax increases, however, are not a viable option for the joint committee,” Mr. Boehner said. Instead, he emphasized that meeting the deficit-reduction target should come largely from overhauling benefit programs like Medicare, Medicaid and Social Security.

 

The Obama proposal has little chance of becoming law unless Republican lawmakers bend. But by focusing on the wealthiest Americans, the president is sharpening the contrast between Republicans and Democrats with a theme he can carry into his bid for re-election in 2012.

[southsider2k5]

For those who think we need to solve the deficit now, here you go.

 

Funny he is naming it after Buffet... You know since Buffet is fighting the IRS to not pay a billion dollars in taxes with BRK.A

[StrangeSox]

that can't be true, Buffet is a champion of the people!

[southsider2k5]

Apparently the UBS guy was making up his own trades. I'm not sure how he managed to do this for 3 years, because at some point either securities aren't getting delivered, or losses are being taken by someone who isn't taking them. I really can't wait to find out exactly how this was done. I am also 100% sure that their internal controls were complete garbage. There is no reason why this shouldn't have been caught in days tops, not years.

 

http://www.guardian.co.uk/business/2011/se...rges?intcmp=239

[southsider2k5]

that can't be true, Buffet is a champion of the people!

 

I also want to go on record as saying I hope both sides stick to their guns and nothing gets done on that plan. No tax cuts, no new spending plans etc. I hope no one compromises and it goes down in flames.

[Balta1701]

I also want to go on record as saying I hope both sides stick to their guns and nothing gets done on that plan. No tax cuts, no new spending plans etc. I hope no one compromises and it goes down in flames.

You do realize that if it goes down in flames, there are huge defense cuts unless Congress can agree on voting them away?

[StrangeSox]

Why?

[southsider2k5]

You do realize that if it goes down in flames, there are huge defense cuts unless Congress can agree on voting them away?

 

The "stimulus" bill is only attached to the cuts if they decide to make it that way.

[Balta1701]

Oh, you're referring just to the "American Jobs Act".

 

The giant defense cuts happen if/when the "Supercommittee" can't agree on anything. I'm lumping it all together right now, especially when you say that you want no new tax or spending plans.

[NorthSideSox72]

Apparently the UBS guy was making up his own trades. I'm not sure how he managed to do this for 3 years, because at some point either securities aren't getting delivered, or losses are being taken by someone who isn't taking them. I really can't wait to find out exactly how this was done. I am also 100% sure that their internal controls were complete garbage. There is no reason why this shouldn't have been caught in days tops, not years.

 

http://www.guardian.co.uk/business/2011/se...rges?intcmp=239

 

I agree. And this doesn't appear to be similar to SocGen either, in that it does not have a very important "feature" of SocGen... specifically, that trader had worked in the back office before, and was able to access and manipulate the BO data directly (or through cohorts), distoring how the trades and positions appeared. No mention of that in the UBS case, and without that, it is really hard to imagine how it was done. I mean, if the trades were fictitious, why was there no clearing side reconciled? If they were exchange-traded instruments, the data from the clearing house(s) would have shown breaks, which would have been immediately obvious. If they are OTC, then the broker data should have shown the trades, or again, shown breaks. The only way to make these look like real trades when they weren't, is either he had help (on the broker, clearing house or back office operations sides), or he manipulated data that he should never have had direct access to. Either way, the internal checks and balances at UBS must have been severely lacking for this to occur.

 

[Balta1701]

Either way, the internal checks and balances at UBS must have been severely lacking for this to occur.

Anyone want to step up to the plate and tell me why this isn't deliberate?

[NorthSideSox72]

Anyone want to step up to the plate and tell me why this isn't deliberate?

Because it would be institutionally stupid. Deliberate by the trader, and possibly some cohorts, sure - like a gambling addict. Deliberate by UBS at an institutional level? That makes zero sense. Nowadays, the last thing IB's want to do is multi-billion dollar, naked directional bets and hope it works. The risk is too high, and they know there is a high risk it either falls apart and/or they get caught.

 

[southsider2k5]

I agree. And this doesn't appear to be similar to SocGen either, in that it does not have a very important "feature" of SocGen... specifically, that trader had worked in the back office before, and was able to access and manipulate the BO data directly (or through cohorts), distoring how the trades and positions appeared. No mention of that in the UBS case, and without that, it is really hard to imagine how it was done. I mean, if the trades were fictitious, why was there no clearing side reconciled? If they were exchange-traded instruments, the data from the clearing house(s) would have shown breaks, which would have been immediately obvious. If they are OTC, then the broker data should have shown the trades, or again, shown breaks. The only way to make these look like real trades when they weren't, is either he had help (on the broker, clearing house or back office operations sides), or he manipulated data that he should never have had direct access to. Either way, the internal checks and balances at UBS must have been severely lacking for this to occur.

 

I'm trying to figure it out myself. I am guessing that these were UBS to UBS, who clears their own trades. So there isn't any outside trades missing. The only thing I can guess is that the guy was making up these products at the underwriting level, because ETF's aren't a "real" security. Especially if he found stuff that UBS That was underwriting themselves, that way if they are showing them as being there, they don't know any different? I don't know. I am still trying to wrap my head around it.

 

The one thing I am sure of is that he couldn't have done this alone. If he could, that means he had access to WAY too many different departments, which defeats every single control mechanism there is. Chinese Wall stuff alone should tell you that no person should have access to that many levels at that stage of management.

[southsider2k5]

Anyone want to step up to the plate and tell me why this isn't deliberate?

 

The guy just took a Two Billion Dollar Loss. The idea is to prevent just that. If the guy was winning, the controls wouldn't matter.

[Balta1701]

Because it would be institutionally stupid. Deliberate by the trader, and possibly some cohorts, sure - like a gambling addict. Deliberate by UBS at an institutional level? That makes zero sense. Nowadays, the last thing IB's want to do is multi-billion dollar, naked directional bets and hope it works. The risk is too high, and they know there is a high risk it either falls apart and/or they get caught.

So the 2 possibilities here are that one of the world's biggest banks is "Institutionally stupid"/"Severely lacking", or sadistic/gambling addicted in a way that you find hard to believe.

[Balta1701]

The guy just took a Two Billion Dollar Loss. The idea is to prevent just that. If the guy was winning, the controls wouldn't matter.

That's my point...if there are guys conducting trades that should be illegal, but they wind up making a profit and the bank turns a blind eye...