I strenuously disagree with UBS CEO Oswald Gruebel

September 19, 2011

This post was originally published at Kid Dynamite’s World.

There are a lot of people out there who deride Wall Street as a bunch of loose canons gambling with other people’s money. Others think that Wall Street traders are dangerous psychopaths, where any one maniacal gunslinger can take insane risks and blow up the global financial system. As I’ve written numerous times: in all of my experience, this has not been the case. Now, however, we have the CEO of a major investment bank basically confirming those views. UBS CEO Oswald Gruebel was quoted today, in the wake of his firm’s $ 2.3B loss in a “rogue trader” scandal:

Speaking for the first time since UBS revealed the loss, Gruebel told the Swiss weekly Der Sonntag that the loss couldn’t have been prevented.

“If someone acts with criminal energy, then you can’t do anything. That will always be the case in our business,” the former trader said in the interview published Sunday.

Uggh.. Mr. Gruebel – are you sure you want to go that route? Because if what you say is true – that investment banks are helpless to prevent such actions, then the public’s fears about those banks being serious hazards to the global financial system are true. Again, with the experience that I have had, I positively do not believe that such losses are unpreventable.

I don’t really want to talk anymore about rogue traders – either:

a) I am a complete idiot and only a fool like me could not be able to figure out how to fool everyone in the bank and rack up billions in losses or

b) There are multiple systems in place to make sure that things like this don’t happen, and the bank has to seriously screw up in order to not catch it.

I think the answer is “b,” but if there’s a rogue trader out there who wants to give me a detailed crash course in how easy this is, I’m still willing to listen.

Numerous commenters on my previous two blog posts mentioned how easy it would be to fool the risk management systems. This may be partially true (although not on the scale of tens of billions of dollars), but my point with the earlier posts was to illustrate that there is a lot more than risk management involved.

Anyway, UBS released another statement today, including the details:

The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio. However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS’s risk limits.

Again, for me, this explanation isn’t a case of “oh ok – fine – now I completely understand how such a problem arose and went undetected.” My questions remain unanswered – how does no one say anything in Treasury – asking to confirm the notional amounts? How does no one confirm the details of the trades with the alleged counterparties? How does no one ask for margin as the losses accrue into the hundreds of millions and then billions of dollars? And finally, wtf is a “forward settling cash ETF position*?” Forward settling cash position is an oxymoron, isn’t it?

Most importantly, the reason I think it’s important to highlight why I disagree with Gruebel is because if Gruebel is correct, and Wall Street investment banks are helpless in the face of a bad apple trader who wants to reek havoc, then the entire Street should be shut down. Needless to say, I don’t think that’s the case, and I don’t think that the banks are helpless to detect criminal activity within their businesses. In fact, it’s one of their main jobs.

As SocGen “rogue trader” Jerome Kerviel said in a 2010 Der Spiegel interview:

SPIEGEL: Can banks really control people like you?

Kerviel: Of course. But you have to want to. Having more controls and regulations goes against efforts to pursue consistently higher profits at a time when all banks want to maximize their return on equity.


related: “I have an Error“ and “Losing $ 2B Without Anyone Knowing About it is Harder Than You Think

disclosure: My first job on Wall Street was as a summer intern at SBC Warburg, which later became Warburg Dillon Read and then UBS. I believe that I reported to a guy who reported to a guy who reported to a guy who reported to Oswald Gruebel, even back then. I have no positions in $UBS

* I think that what UBS meant by “forward settling cash ETF positions” is really “forward settling vanilla ETF positions” – ie, OTC forward trades in listed vanilla ETF products – as opposed to structured derivatives trades on ETFs or synthetic replication, etc… but that’s just my guess

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