According to a report by the BBC, it wasn’t until Adoboli told his colleagues about the huge losses he had generated that UBS actually realised anything untoward was going on – even though some analysts have already linked the rogue trade with a huge fall in the value of the Swiss franc last week. While UBS itself refuses to say which division, or indeed which country, the trade took place in, the Financial Services Authority has already put UBS under investigation to try to find out why it didn’t spot the unauthorised transactions. And even more worryingly, if the investment bank makes a loss in 2011, it’ll trigger ‘clawback’ clauses in bankers’ contracts which allows it to reduce – or even eliminate – bonuses this year. The poor dears.
Of course, the risk-averse attitudes of investment bankers have come under heavy fire since the beginning of the recession – not least by the Government’s Independent Commission on Banking, which, rather ironically, recommended at the beginning of the week that banks’ retail and investment arms be ring-fenced to protect savers. But even without those recommendations, by now, banks were supposed to have implemented stringent measures to control the amount of risk their traders take.
So this will no doubt provoke plenty of debate as to whether it’s ever going to be possible for investment banks to limit the amount of risk they take. After all (and to be fair to him), Adoboli was only taking the kind of risks banks regularly reward their traders for. The obvious answer, of course, is to force banks to separate their investment and retail arms altogether (which UBS is, apparently, under pressure from the Swiss government to do). But the problem with that would be that standalone investment banks are deemed much riskier by credit ratings agencies, so borrowing would be much costlier.
Although that might actually not make an awful lot of difference to UBS now: Moody’s, the credit ratings agency which has just downgraded two of France’s largest banks, says it’s put UBS’ rating ‘under review’. That’s not, it added, because it doesn’t think the bank is sturdy enough to absorb Adoboli’s loss – but because it’s worried that the risk management systems it has in place are inadequate. Fair enough, really.
So what’s going to happen now? For his part, Adoboli has apparently hired the same law firm used by Nick Leeson, the rogue trader who brought down Barings bank. For UBS, this is no doubt the beginning of a long and painful session of navel-gazing which could, according to reports from Swiss newspaper Tages-Anzeiger, result in even more job losses at the bank. We’d like to say investment banks will learn a lesson from this, but it’s difficult to say for sure.