‘Swiss’ and ‘staid’ are no longer two words that you can link, if a third word, ‘bank’, is present. The management of UBS must hope that investors don’t decide that ‘secure’ is another word that they do not want to associate with ‘Swiss’.
The news last week that UBS had managed to lose $2.3 billion because of the alleged activities of a rogue junior trader sent shock waves through the banking industry. Market participants could not comprehend how in this age of ‘regulator rules all’ such a pernicious event could occur. The Abigail with attitude column calls for the dismissal of anyone involved with the regulation of UBS’s investment bank, whether in London or Zurich. This is a colossal failing of risk management and regulation. How can one individual be allowed to carry out trades that expose the institution to such extensive losses? UBS points to the fact that Kweku Adoboli, a trader on its Delta One desk, was acting fraudulently. But he was obviously dealing in huge amounts. And surely any risk function has to take into account the possibility of fraud when compensation is linked to profitability? It seems pretty basic to me. If crafty Kweku’s dealing volumes had been much lower, and UBS’s oversight much higher, I doubt the bank would be in such a pickle. A source mutters cryptically: “American banks don’t have rogue traders. At American firms, the risk function rules the roost.”
Hundreds of column inches have been dedicated in the past few days to trying to explain to readers exactly what Delta One trading is. It is a complex area and I do not understand it fully. But I’m beginning to wonder if the most senior bankers and risk managers in the City understand it fully either. Jérôme Kerviel, Société Générale’s notorious fraudster, worked in the same area. I’ve always believed in the kiss (keep it simple stupid) principle. Given that nearly $9 billion has been lost by two relatively junior traders in this area in the past four years, should banks be involved in Delta One trading at all? The risks certainly seem to outweigh the rewards.
I am not the only person who thinks this way. The appalling UBS incident makes it less likely that long-term investors will buy bank shares. At the weekend, I received an email from a loyal reader in Dubai. “Dear Abigail,” he wrote, “the latest Euromoney issue is in front of me and as usual, the first thing I did was to go through your thoughts. As always, I cannot agree with you more on your analysis and will anxiously wait for your comments on the latest bizarre incident where a prime European bank was taken for a ride by a three-decade old trader.
“You would assume after Barings and Lehman Brothers, at least the big ones would have fixed the issue by bringing on foolproof systems, controls and audits to avoid recurrence of such incomprehensible incidents. Continuation of such occurrences in such large institutions gives you a scare of the highest order as to what else may be going on in the prime financial institutions that we may not be currently aware of.”
What next for UBS? Inevitably, reputations have been tarnished. Ossie Grübel, UBS’s chief executive, looks out of touch, while there must be doubts about Carsten Kengeter, head of the investment bank, and Maureen Miskovic, the chief risk officer. The UBS board meets this week in Singapore. They will have to announce some changes or be deemed impotent pen-pushers. A reliable source opined: “I’m not optimistic about the future for UBS’s investment bank. This is a loss too far.” Source’s pessimism might be well founded but I’m more concerned about succession planning. The board needs to highlight a clear successor to Grübel who, at 67, is no longer in the first flush of youth.
The Abigail with attitude column is always where the action is. The evening before news of the UBS trading loss broke, I co-hosted a round-table dinner for some senior bankers and businessmen. One of the division chiefs in UBS’s investment bank attended the dinner. UBS banker was in sparkling form, although at one point he did state: “I am very bearish.” The next morning several other guests emailed me to say that they were nicknaming senior UBS banker ‘the cool cucumber’. Even now, I’m not sure if Cool Cucumber was aware that 12 hours after the dinner his investment bank would announce a loss wiping out all its profits for the first half of the year.
At the dinner, most people were highly pessimistic. One successful international businessman said firmly: “Next year, the world will enter a global recession.” For a contrarian like myself, this gloomy sentiment is nirvana. I expect stock markets to bounce before too long even though the Greek drama probably has a tragic ending.
Amid all this market turmoil, I was intrigued to see that John Mack, the chairman of Morgan Stanley, was finally stepping down from the firm. Given the mess the firm got into under his watch, I’m not quite sure why he’s still employed by Morgan Stanley anyway. James Gorman will add the chairman title to his chief executive handle. For a few weeks now, rumours have been circulating that a poisonous article regarding Morgan Stanley would surface on one of the screen services. When it did appear, it focused on the supposedly hostile relationship between the two co-heads of institutional securities, Colm Kelleher and Paul Taubman.
“A silly article,” one protagonist sniffed.
“What is there of substance?” rebuked another insider. “Two co-heads don’t get on. What’s new about that in this industry?”
Of course, this is true despite investment banks’ insistence that their senior management teams are one big happy family. What was embarrassing about the story was that it surfaced on the day Morgan Stanley was hosting its annual press reception in London. Coincidence or conspiracy, I ask myself? Nevertheless, Kelleher, who hosted the evening, seemed in excellent form. I like Colm a lot. He has one of the best brains in the business and a withering sense of humour. I wouldn’t want to invoke his ire, so whoever planted the ‘feuding co-heads’ story might want to watch his or her back.
How was your week? News and views please to Abigail@euromoney.com
