Financial News

[StrangeSox]

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

 

don't you "hedge your bets" at the time you make your bet?

[southsider2k5]

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

 

Very simply, you don't have to "hide" a profit. Why would you?

[NorthSideSox72]

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.

 

Well, keep in mind that in the SocGen case, Kerviel did indeed have access and skills to directly manipulate the back and middle office databases, because he had started in that area and SocGen failed to turn off his access, as well as failed to have audit checks in place for data manipulation. This is why firms nowadays pretty much never allow people to move between trading and operations/development/clearing.

 

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.

 

On the first, I think you misunderstand the concept of margins - if he is out there naked, his capital requirements are actually much more intensive. And I have no idea what you mean about Europe and 40-1.

 

Second, you are talking about UBS' prop business shooting the moon - and UBS' prop business is not going to get bailed out. They know that. Any step-in would be to help the other side of those trades, not UBS itself, and the people at UBS involved all lose their jobs. This theory here makes no sense.

 

[StrangeSox]

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.

 

And as long as that pays off eventually for enough traders, what incentive does UBS have to actually stopping this practice? If it goes to s***, they'll just throw the trader under the bus.

 

This is assuming that this sort of gambling pays off more often than not, which may not be the case. Lets say this guy had accumulated $2B in losses but hit it big in his next trade, resulting in a net gain for the bank. Where's the downside for UBS?

[southsider2k5]

don't you "hedge your bets" at the time you make your bet?

 

That doesn't sound at all like what happened here, nor what type of business these guy was in.

[NorthSideSox72]

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.

 

 

don't you "hedge your bets" at the time you make your bet?

 

SS2K5 is talking one possible scenario - that the trader went in naked (which is not illegal, but may be against internal rules, hard to say), started seeing losses, and scrambled to either make covering trades or make up hedging trades to obscure. That is possible.

 

But as StrangeSox says, typically yes, you engage your full strategy up front, not as a reaction - though it depends. And that is another possiblity here - that he elected up front to make up a hedge side, to try to get more return.

 

[StrangeSox]

Very simply, you don't have to "hide" a profit. Why would you?

 

You hide the losses long enough until you turn that profit.

[southsider2k5]

And as long as that pays off eventually for enough traders, what incentive does UBS have to actually stopping this practice? If it goes to s***, they'll just throw the trader under the bus.

 

This is assuming that this sort of gambling pays off more often than not, which may not be the case. Lets say this guy had accumulated $2B in losses but hit it big in his next trade, resulting in a net gain for the bank. Where's the downside for UBS?

 

Because the entire company can go under, aka Bearings Bank or Refco?

[Balta1701]

Because the entire company can go under, aka Bearings Bank or Refco?

I know I said I give...but come on man...I'm really supposed to expect that the governments out there will allow UBS to "go under"?

[southsider2k5]

You hide the losses long enough until you turn that profit.

 

Those things end up coming out in the wash. Even if it isn't immediate. It still gets everyone fired and the bank in assloads of regulatory problems.

[southsider2k5]

I know I said I give...but come on man...I'm really supposed to expect that the governments out there will allow UBS to "go under"?

 

If the losses get to the point where they affect capital reserves and legal status? It has happened before.

[Balta1701]

If the losses get to the point where they affect capital reserves and legal status? It has happened before.

And it worked so well when it happened to Lehman Brothers.

 

Come on man. I have a right to be skeptical on this one.

[southsider2k5]

And it worked so well when it happened to Lehman Brothers.

 

Come on man. I have a right to be skeptical on this one.

 

You can feed whatever agenda you want, it doesn't mean it is right. A company in this day an age is not going to be stupid enough to systematically risk their existence for one trader. That doesn't even make any sense.

[NorthSideSox72]

And as long as that pays off eventually for enough traders, what incentive does UBS have to actually stopping this practice? If it goes to s***, they'll just throw the trader under the bus.

 

This is assuming that this sort of gambling pays off more often than not, which may not be the case. Lets say this guy had accumulated $2B in losses but hit it big in his next trade, resulting in a net gain for the bank. Where's the downside for UBS?

You can't be serious with this. Again, paranoia not connected to reality. UBS already makes money, and takes risks. If they wanted a trader to take a $2B risk, then they would have DONE THAT. No need for the illegal covers, just make the bet - if they actually thought the way you think they do (which they don't, but I am playing along).

 

And we are seeing the downside for UBS. How can you say there is no downside? They just lost $2B, in addition to who knows what sort of fines, levies, job losses, reputation, etc.

 

[StrangeSox]

I just watched Frontline's The Card Game episode this morning so I'm extra at banks today

[southsider2k5]

You can't be serious with this. Again, paranoia not connected to reality. UBS already makes money, and takes risks. If they wanted a trader to take a $2B risk, then they would have DONE THAT. No need for the illegal covers, just make the bet - if they actually thought the way you think they do (which they don't, but I am playing along).

And we are seeing the downside for UBS. How can you say there is no downside? They just lost $2B, in addition to who knows what sort of fines, levies, job losses, reputation, etc.

 

Exactly. It just proves that this stuff does have consequence.

[NorthSideSox72]

I just watched Frontline's The Card Game episode this morning so I'm extra at banks today

To be clear here, I am not defending UBS here. Clearly, even if the trader was very crafty, UBS has major internal problems, and they are now paying the steep price for it. Just saying that you have entirely the wrong motivation here for them.

 

[StrangeSox]

You can't be serious with this. Again, paranoia not connected to reality. UBS already makes money, and takes risks. If they wanted a trader to take a $2B risk, then they would have DONE THAT. No need for the illegal covers, just make the bet - if they actually thought the way you think they do (which they don't, but I am playing along).

 

I'm phrasing these all as questions because I simply do not know how this functions and you guys do.

 

And we are seeing the downside for UBS. How can you say there is no downside? They just lost $2B, in addition to who knows what sort of fines, levies, job losses, reputation, etc.

 

But how do we know that "rogue" traders haven't made similar moves and netted billions in profits in the past?

[southsider2k5]

I'm phrasing these all as questions because I simply do not know how this functions and you guys do.

 

 

 

But how do we know that "rogue" traders haven't made similar moves and netted billions in profits in the past?

 

Because from a regulatory standpoint, they would have been just as in trouble as if they lost billions. It still would have been front page news, and it would have created more rules because of it.

[StrangeSox]

To be clear here, I am not defending UBS here. Clearly, even if the trader was very crafty, UBS has major internal problems, and they are now paying the steep price for it. Just saying that you have entirely the wrong motivation here for them.

 

Possibly, I'm asking questions to test the validity of the "let it happen" theory that gets tossed around whenever a story like this happens. I appreciate the both of you explaining the various ways it doesn't add up to you.

[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.

 

 

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.

 

 

Because from a regulatory standpoint, they would have been just as in trouble as if they lost billions. It still would have been front page news, and it would have created more rules because of it.

I'm still lost here, since to me, post 3 in this list sounds like it completely contradicts posts 1 and 2.

[StrangeSox]

Because from a regulatory standpoint, they would have been just as in trouble as if they lost billions. It still would have been front page news, and it would have created more rules because of it.

 

This was "discovered" because the trader came forward. How many times have banks faced problems from similar actions that eventually wound up profitable?

[southsider2k5]

I'm still lost here, since to me, post 3 in this list sounds like it completely contradicts posts 1 and 2.

 

In the first couple of posts I am saying that you really don't need to make up fake hedges to cover winners. In the third post I am saying if you did, you would be in just as much trouble as if you faked winners or losers.

[southsider2k5]

This was "discovered" because the trader came forward. How many times have banks faced problems from similar actions that eventually wound up profitable?

 

Talking to my boss who has been doing this for 25 years, never.

[StrangeSox]

Talking to my boss who has been doing this for 25 years, never.

 

..so if they never face problems if they turn a blind eye to these trades that eventually wind up positive after enough bets, how do you get to this:

 

Because from a regulatory standpoint, they would have been just as in trouble as if they lost billions. It still would have been front page news, and it would have created more rules because of it.

 

 

Or are you saying that what this guy did never ends up profitable?