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The return of the rogue trader – but not the end of UBS | Seth Freedman

The bank’s bn ‘unauthorising trading’ loss may sound staggering, but it did make bn last year

UBS’s disclosure of a bn “unauthorised trading” loss delivers yet another blow to the already battered reputation of the global banking sector. Sir John Vickers’s call for ringfencing banks’ retail arms from their investment operations sounds all the wiser on the back of the news that “rogue trading” may still be alive and kicking on a massive scale at one of the world’s most distinguished financial institutions.

Those with an innate disdain for the machinations of global finance will take succour from the revelations, calling for even tighter regulations than Vickers demanded. However – despite the mammoth amounts lost by UBS – there is a danger of getting carried away by what is essentially a storm in a Swiss teacup.

As Simon Cawkwell, the City’s most famous short-seller, put it to me an hour after the story broke, “I wouldn’t short sell UBS [as a reaction to the incident]; after all, this is a bank that makes around bn per year.” UBS will not go to the wall as a result of the loss in the way that Barings did after Nick Leeson’s calamitous trades, and neither will the financial world stop turning simply because of an isolated and wholly containable event.

Full details of how such a colossal sum could be lost by one bank have yet to emerge, but what is certain is that the pressure to perform can drive traders to extraordinary lengths in their desire to succeed. According to a Canary Wharf-based prop trader whom I interviewed: “To be a pure, driven trader you’ve got to have balls of steel, a stinking horrible personality, and be a nasty person, a risk taker and a gambler.” Such characteristics are actively encouraged by bank bosses in their employees, he told me, and in a dog-eat-dog environment such as that, it is little wonder that extreme situations emerge.

Jerome Kerviel – whose unauthorised trades cost his employers almost €4bn – later spoke of his amazement that no one reined in his wild trading at the height of his excesses. “I thought it was incredible that no one came to talk to me about this. My positions made money, so I told myself that it legitimised what I was doing.” When he was winning, he told a court-appointed psychologist, his SocGen bosses did nothing more than caution him against taking such huge positions in future; when he eventually cost the bank billions, suddenly he was singled out as acting as a lone wolf.

Cawkwell is incredulous that such incidents are still taking place today. “In view of Kerviel, why is it that comparable disasters can [still] emerge?” he said. “I highly doubt that the losses at UBS took place over the course of one day; they are far more likely to have occurred over a year, so there must have been a lot of debiting done by this chap, he must have been making payments somewhere [which required authorisation by superiors].”

Ultimately, while the news from UBS makes for good “shock horror” headlines, it doesn’t teach the public anything they didn’t already know about global finance. Yes, huge amounts of money and power are concentrated in the hands of traders and their in-house compliance officers alike. Yes, there are clearly insufficient checks and balances at certain firms to prevent abuses occurring year in, year out.

But those are the breaks. You pays your money into the banking system by the bucketload – retail savers and corporate investors alike – you takes your choice. And the vogue choice is still rampant capitalism – rogue trader, warts and all. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds