Ex-UBS trader says Swiss bank was probably trying to cover up its losses
September 15th, 2011
Ex-UBS trader Shaun Richards has come up with an interesting theory of what went wrong at UBS’s Delta One unit, whose trader Kweku Adoboli was arrested at 3.30am this morning and I believe remains in custody.
Richards believes that the Swiss bank got caught with its trousers down when the Swiss central bank devalued the Swiss franc on September 6th. In the aftermath of these losses, Richards believes that a clever UBS trader — perhaps Adoboli or his recently departed boss John Hughes – came up with a clever ploy through which they believed they could cover up the losses. Unfortunately however, the scheme failed.
Over to Shaun:-
“If we look at the size and timing of this then it looks possible that UBS was long the Swiss franc when the Swiss National Bank devalued and established a currency floor at €1.20. Whilst you mull over the irony of the SNB hurting UBS (The Swiss taxpayer who has already bailed out UBS once might have other words to describe this…..) let me give you a few more thoughts.
“In my experience a large loss is usually accompanied by “somebody clever” coming up with a fix and, in my experience, this invariably makes the loss worse. This would explain why there has been a delay between the devaluation and this loss being announced now. Of course no-one will officially admit to this.
“Also, under pressure, individuals tend to hide such things as best they can even what you would consider to be “nice upstanding individuals”, before the event anyway. I have worked with someone who under pressure put his loss-making deals in his bottom drawer and kept them quiet.
“Of course he was soon found out and, for the bank, there is the issue of what to do next, which in general is to keep it quiet if they can.
“If there is a theme in this it is that the pressure that markets can put on an individual’s personality can be extreme and sadly some do break under it. This is rarely reported for obvious reasons but there you are and I can assure you that if you are a witness to it the questions it raises are difficult to fully answer.
Hmm. Very interesting to read this take from a former UBS insider. For more background on the $2bn losses allegedly racked up by ‘rogue’ trader Adoboli, see my blog post from this morning.
Update 1: 4.15pm, Sept 14th, 2011:-
Echoing what I said in my previous “How much did UBS know?” blog post, the FT’s John Gapper has written an insightful blog saying given its track record it’s safer and fairer to assume that UBS is a “rogue bank” than to describe whoever racked up these $2bn losses (and it may well not have been Adoboli) as a “rogue trader”.
Update 2: 5.10pm Sept 14th, 2011:-
Just found an excellent take on the possible scapegoating of the Ghanaian-born trader by UBS, on WC Varones.
“[he] sounds like a convenient guy to throw under the bus … either our Ghanaian friend was able to take on huge directional bets with his supervisors and risk managers completely unaware, or, more likely, the bank was systematically taking little risks that would never blow up unless something crazy happened like the Swiss National Bank going Full Bernanke. And when it blows up, blame the black guy with the foreign name.
Update 3: 5.40pm. Sept 14th, 2011
After having read reams of BS on Delta One, it was refreshing to read this tweet from the FT’s investment editor James Mackintosh:-
“For those baffled by “Delta One”: banks trying to generate above-market returns from client funds (ETFs, swaps), and pocket the difference”
Shaun Richards is a independent economist who studied originally at the LSE. “My speciality is monetary economics and I use it to analyse current economic trends. I started my career in the City of London in 1985 and bring my trading experience in bond, currency and derivative markets to my analysis of today’s economic events.” Follow him on twitter @notayesmansecon and at Mindful Money
Short URL: http://www.ianfraser.org/?p=4783