UBS “Rogue” Trader: One Trade Away from Banking Armageddon?

The trial of the Swiss bank UBS “rogue” trader Kweku Adoboli began in London last Friday with the prosecution claiming his trading “could quite easily have approached and even exceeded the limits of the bank's resources,” the Wall Street Journal reported. The prosecution said that at one point, Adoboli’s trading could have racked up nearly US $12 billion in losses; as it was, his trading ended up costing the bank over $2.3 billion in direct losses and another $4 billion or so in share price. It also led to the resignation of then UBS chief executive Oswald Gruebel.

The prosecution introduced an email allegedly sent from Adoboli to an accountant working in the back office for UBS when the massive losses were discovered in which he takes personal responsibility for the disastrous trades that violated bank procedures, the London Telegraph reports. However, another Telegraph story also reports that Adoboli – who pleaded not guilty to charges of fraud and falsifying records to cover up his trades – “will claim he was not acting dishonestly and that colleagues on his desk knew what he had been doing.”

Convicted former trader Jérôme Kerviel of the French bank Société Générale fame  tried to run that defense too, but without much success. In addition, there wasn’t a memo from Kerviel in which he basically says he fabricated deals, lied to colleagues, and broke the bank rules as in Adoboli’s case.

That said, Adoboli’s lawyer does have emails from Adoboli and his line manager that may cast some doubt on the claim that no one knew what Adoboli was up to. According to Reuters yesterday, when Adoboli exceeded his trading limits but also made a large sum of money for UBS, his line manager “scolded Adoboli for exceeding the desk's trading limit and told him that in future he should let [his line manager] know first.”  The lawyer also says there are emails from at least one of Adoboli’s colleagues that who knew that Adoboli was hiding trades.

It has been often noted that the definition of a “rogue” trader is one who loses the bank’s money when flouting its risk controls; when the same trader makes the bank money doing the identical thing, they are considered royalty.

As Reuters noted, “The question of how much UBS managers knew about Adoboli's trades and whether or not they condoned his breaking of internal rules in the pursuit of profit will be central to the case.”

According to prosecutors, Adoboli learned how to bypass the bank’s risk management controls when he worked the UBS back office processing trades, the WSJ reported. He took this knowledge and began applying it in 2008, after he had reached “the more lucrative and prestigious trading floor,” the Journal goes on to say. Prosecutors allege that  it all began with a legitimate trade that lost some $400 000 and Adoboli subsequently booking a false trade to hide his losses.

Interestingly, it was also in 2008 that Kerviel’s $6.1 billion trading loss was exposed, and banks everywhere, including UBS, claimed that they were improving their trading desks’ risk controls. This timing, the Journal noted, might “shed an uncomfortable light on how a relatively junior trader could have caused the largest unauthorized trading loss in U.K. history, despite the giant bank's sophisticated risk controls.” I think there are a lot of enterprise risk management folks interested in hearing about how that happened as well.

Prosecutors hinted that one reason for Adoboli’s ever growing “gambler’s mind-set” as they put it, is that he was massively in debt, despite earning over $500 000 in salary and bonuses in 2010. Apparently, he used large amounts of his earnings for personal trades that also went under in 2011.

Adoboli faces a total of 34 years in jail if convicted on all counts. The trial is expected to last for about  eight weeks.

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