Sir John Vickers, who just unveiled plans to protect U.K. retail deposits from investment banking losses, can allow himself a wry smile. The $2-billion loss run up in rogue trades at UBS is a timely reminder of the dangers of so-called “casino” banking.
It is serendipitous for supporters of ringfencing -- for the moment, winning the political argument in the U.K. -- that the trading blow-out occurred at a bank in receipt of an expensive bail-out from a government, albeit the Swiss one, in 2008.
UBS’s maverick transactions have caused too little damage to strain the bank’s stability, though a $2-billion writeoff could trigger a third-quarter group loss. But the ease with which deluded or dishonest traders can evidently still dodge internal risk exposure limits will contribute to distrust of an investment banking sector where bad legitimate bets are a far greater systemic problem.
Accident-prone Swiss gnomes have yet to disclose the names of colleagues suspected of unauthorized trades. The result will be a speculative humming of the banking bush telegraph until the ceremonial outing of the man (or woman -- there is a considerable glass ceiling to be broken in rogue trading). The case will give the greatest associative boost to ringfencing because the implosion appears to have occurred within UBS’s City of London satellite.
The amount would place the alleged culprit -- assuming there is only one -- around third in the all-time league table of bank bad apples. Jérôme Kerviel remains the all-time champ, having run up losses of $7.2-billion in European index futures at Société Générale between 2006 and 2008. Yasuo Hamanaka, the “Mr Five Per Cent” who reputedly controlled that proportion of the world copper market, lost around $2.6-billion for Sumitomo Corporation in the 90s. Nick Leeson, the loose cannon immortalised in a bad film starring Ewan McGregor, dropped a paltry £830-million on index futures, though he did bring down Barings, a centuries-old merchant bank, in the process.
The term “rogue trader” is usually a misnomer. It implies swaggering recklessness. The reality is more often a sweaty young man desperate to please bosses with trading coups that go wrong and who cover their tracks to protect their reputations. Missing out on a framed “employee of the month” certificate is now the least worry of whoever is in the frame for UBS’s $2-billion deficiency.
Incidentally, no big investment bank has ever exposed a rogue trader that made it big profits. Funny, that.