Financial News

[southsider2k5]

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.

 

The most realistic scenario is that this guy and a few people in the right places broke a bunch of laws, while the company put too much trust in the fact that these few people wouldn't get together to manipulate the system.

[southsider2k5]

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...

 

Your assumption is wrong. If they are winning trades, they don't need to make up stuff to cover them, and an illegal act is never committed.

[Balta1701]

The most realistic scenario is that this guy and a few people in the right places broke a bunch of laws, while the company put too much trust in the fact that these few people wouldn't get together to manipulate the system.

Of course, my personal reaction to that statement would be..."that tells me that either the regulations aren't strong enough to prevent that from happening, the regulations are strong enough but they're systematically not enforced, or they are enforced but the bank as a whole deliberately turns a blind eye to systematic violations."

[Balta1701]

Your assumption is wrong. If they are winning trades, they don't need to make up stuff to cover them, and an illegal act is never committed.

So...if the guy makes highly risky trades, logs somewhere in the system that he's hedged against possible losses from those trades, doesn't actually hedge against those losses, but then reaps big wins on the highly risky trades, it's no problem?

[NorthSideSox72]

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.

 

If they were UBS to UBS, as a self-clearing entity, I don't think that exactly works either. If they are exchange-traded, then either the trades have to hit the tape (so there is still clearing data), or it is a bulk transfer (in which case it isn't a trade at all, and someone who is supposed to actually hold the security would have to notice). If it is OTC internal, then again, it isn't possible for UBS to take a realized $2B loss on it anyway, as it is just an internal transfer of already-held assets. And an ETF is still real in the sense that a trade on said exchange still hits the tape.

 

Dark or grey pools are broker-checked for clearing purposes, and I suspect that may be the culprit here - if he had help on the other/broker side. If he didn't, then someone had to be either actively ignoring or intentionally manipulating data to make the process appear whole for these fake trades.

 

 

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.

 

The latter is just not the case. Has to be some version of one of the former, combined probably with intentional manipulation of some kind.

 

 

[StrangeSox]

Your assumption is wrong. If they are winning trades, they don't need to make up stuff to cover them, and an illegal act is never committed.

maybe "outside the bounds of institutional controls" would be better.

 

If this guy made $2B making unauthorized trades, would we ever hear about it?

[southsider2k5]

Of course, my personal reaction to that statement would be..."that tells me that either the regulations aren't strong enough to prevent that from happening, the regulations are strong enough but they're systematically not enforced, or they are enforced but the bank as a whole deliberately turns a blind eye to systematic violations."

 

Honestly, I have no idea what the English and Swiss regulatory systems look like.

[southsider2k5]

maybe "outside the bounds of institutional controls" would be better.

 

If this guy made $2B making unauthorized trades, would we ever hear about it?

 

Like I said earlier, if he is making money, no illegal covers ever take place.

[Balta1701]

The latter is just not the case. Has to be some version of one of the former, combined probably with intentional manipulation of some kind.

I know you guys don't buy a lot of my opinions on the financial industry, but can you see how I'd be incredibly, extremely skeptical of your dismissal in this case?

[NorthSideSox72]

So...if the guy makes highly risky trades, logs somewhere in the system that he's hedged against possible losses from those trades, doesn't actually hedge against those losses, but then reaps big wins on the highly risky trades, it's no problem?

The bolded would be per se against UBS rules, guaranteed... and if the supposed hedge was reporting of transactions that did not actually occur, it is also per se illegal, whether in the UK, Switzerland or the US.

 

[southsider2k5]

So...if the guy makes highly risky trades, logs somewhere in the system that he's hedged against possible losses from those trades, doesn't actually hedge against those losses, but then reaps big wins on the highly risky trades, it's no problem?

 

The scenario isn't really likely to happen, but yes, people would hear about it. I know I would.

[Balta1701]

The bolded would be per se against UBS rules, guaranteed... and if the supposed hedge was reporting of transactions that did not actually occur, it is also per se illegal, whether in the UK, Switzerland or the US.

But 2k5 just said "if he is making money, no illegal covers ever take place." Can the 2 of you square these statements?

[StrangeSox]

Like I said earlier, if he is making money, no illegal covers ever take place.

 

...so wouldn't UBS be incentivized to turn a blind eye to this type of behavior, as long as enough "unauthorized" trades wind up on the plus side?

[NorthSideSox72]

I know you guys don't buy a lot of my opinions on the financial industry, but can you see how I'd be incredibly, extremely skeptical of your dismissal in this case?

No I can't, because your paranoia defies logic in this case. Why on earth with UBS, at an institutional level, want to do something that stupid? Yes they take risks in their prop trading business, of course they do... calculated ones. But on what planet would it make sense for UBS to tell a trading desk, hey, go out and put yourself naked for potential losses in the billions, don't hedge or anything, just roll the dice. Seriously, there is no logic in that - and no motivation. UBS does not want to do that.

 

[southsider2k5]

If they were UBS to UBS, as a self-clearing entity, I don't think that exactly works either. If they are exchange-traded, then either the trades have to hit the tape (so there is still clearing data), or it is a bulk transfer (in which case it isn't a trade at all, and someone who is supposed to actually hold the security would have to notice). If it is OTC internal, then again, it isn't possible for UBS to take a realized $2B loss on it anyway, as it is just an internal transfer of already-held assets. And an ETF is still real in the sense that a trade on said exchange still hits the tape.

 

Dark or grey pools are broker-checked for clearing purposes, and I suspect that may be the culprit here - if he had help on the other/broker side. If he didn't, then someone had to be either actively ignoring or intentionally manipulating data to make the process appear whole for these fake trades.

 

 

 

 

The latter is just not the case. Has to be some version of one of the former, combined probably with intentional manipulation of some kind.

 

I have no doubt he had help. If he didn't, he had access to an incredible amount of different sectors of the company, which i can't see being true.

[Balta1701]

No I can't, because your paranoia defies logic in this case. Why on earth with UBS, at an institutional level, want to do something that stupid? Yes they take risks in their prop trading business, of course they do... calculated ones. But on what planet would it make sense for UBS to tell a trading desk, hey, go out and put yourself naked for potential losses in the billions, don't hedge or anything, just roll the dice. Seriously, there is no logic in that - and no motivation. UBS does not want to do that.

I can give 2 motivations that strike me as plausible. If they think they're going to win the trades, then the margins are much higher if they don't hedge against the losses...this is how the financial industry in Europe got leveraged 40-1 in the first place. And second...if they think they're going to just get bailed out if they take huge losses.

[southsider2k5]

But 2k5 just said "if he is making money, no illegal covers ever take place." Can the 2 of you square these statements?

 

I don't think you understand the terminology here. There is no sale of securities needed if they are up a sizable amount. They don't have the need to make up illegal trades to "hedge" something that is a massive winner. That's doesn't really make sense.

[NorthSideSox72]

But 2k5 just said "if he is making money, no illegal covers ever take place." Can the 2 of you square these statements?

 

I disagree with that particular statement he made. But what I think he may have been trying to say is, if they guy stretched naked and started making money, he probably wouldn't have even tried to book the false trades anyway - just took the money and ran. Think of it as an O'Hare option without the trip on the Blue Line.

 

...so wouldn't UBS be incentivized to turn a blind eye to this type of behavior, as long as enough "unauthorized" trades wind up on the plus side?

 

There is only that motivation if the people who are reviewing these things - operations, compliance, management - all decided together that the risk level was low enough to be worth it. So unless this guy lost $2B on an investment in the catholicism of the pope, I see zero chance of that being the case, because all those others would lose their jobs over it if it went bad. So no, not really.

 

[Balta1701]

I don't think you understand the terminology here. There is no sale of securities needed if they are up a sizable amount. They don't have the need to make up illegal trades to "hedge" something that is a massive winner. That's doesn't really make sense.

But how do you know something is going to be a massive winner when you make the initial trade?

[southsider2k5]

...so wouldn't UBS be incentivized to turn a blind eye to this type of behavior, as long as enough "unauthorized" trades wind up on the plus side?

 

Very clearly what I am trying to say is that you don't need "unauthorized" trades against winning positions. You cover losing trades because there is the risk of losing money.

[StrangeSox]

I don't think you understand the terminology here. There is no sale of securities needed if they are up a sizable amount. They don't have the need to make up illegal trades to "hedge" something that is a massive winner. That's doesn't really make sense.

 

There are limits on how much you can leverage yourself, no? Isn't the issue that these "rogue" traders leveraged themselves too much and their bet at the casino didn't pay off?

[Balta1701]

I disagree with that particular statement he made. But what I think he may have been trying to say is, if they guy stretched naked and started making money, he probably wouldn't have even tried to book the false trades anyway - just took the money and ran. Think of it as an O'Hare option without the trip on the Blue Line

That's getting closer to what I've been pushing at.

[southsider2k5]

But how do you know something is going to be a massive winner when you make the initial trade?

 

The hedges came after the losses. Otherwise there was no point to making the trades.

[Balta1701]

The hedges came after the losses. Otherwise there was no point to making the trades.

Ok, either I'm totally lost in the the language or there's some time travel involved here. I give.

[southsider2k5]

There are limits on how much you can leverage yourself, no? Isn't the issue that these "rogue" traders leveraged themselves too much and their bet at the casino didn't pay off?

 

Partially. The problem is that when their first bet doesn't pay off, they make a second larger bet, that covers the first one. Then when the second one doesn't pay off, they make a third larger one. In these cases, he was showing that his losses from the first bets didn't exist, because he had already sold and "covered" those losses. Because he didn't have any negatives, he was allowed to keep going.