Sep. 19, 2011 at 11:56 AM ET
Last week's arrest of a UBS trader whose unauthorized speculative trades cost the Swiss bank $2.3 billion has regulators and analysts debating whether the risks involved in complex trading are being managed appropriately.
UBS announced an internal investigation Thursday after revealing a loss "in the range of $2 billion," a figure which it later raised to $2.3 billion.
"The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months," UBS said in a statement published Sunday. "[T]he 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."
The London-based trader, 31-year-old Kweku Adoboli, reportedly hired Kingsley Napley LLC to represent him. The law firm previously defended the trader who bankrupted the bank Barings Plc in 1995 after losing $1.4 billion, and also is representing Rebekah Brooks, the News Corp. executive at the center of the British tabloid phone-hacking scandal.
The charges against Adoboli date to 2008, leading analysts to question why his activities weren't scrutinized or stopped earlier. Adoboli held a position similar to that of Jerome Kerviel, the rogue Societe Generale trader who lost $6.7 billion in 2008 due to speculative bets on the market. Kerviel was supposed to be a cautionary tale for banks, a glimpse of how much damage just one poorly overseen employee can do. Both the British and Swiss financial services regulators, along with the European Commission, have indicated that they plan to investigate supervisory practices at UBS to determine if lax oversight allowed Adoboli to engage in fraudulent activity.
In the wake of the Adoboli revelation, some are already calling for changes in the bank's structure and leadership. CEO Oswald Gruebel brushed off calls from Swiss banking and political figures for him to step down. In an interview with Swiss newspaper Der Sonntag published Sunday, Gruebel defended himself, saying, "If someone acts with criminal energy, then you can’t do anything." A letter sent from the head of UBS's investment-banking division, Carsten Kengeter, to employees on Sunday adopted a humbler tone, according to the Financial Times. Kengeter told staffers:
I want to assure you that we are doing everything in our power to address the frameworks, practices and procedures that should have worked better and strengthen their enforcement, where appropriate. It is very difficult to build and maintain a system which protects us effectively against every possible likelihood of attack, but we will not rest until we have controls that are as watertight as possible. Continued vigilance will be key to ensuring we avoid future failures.
But promises of renewed vigilance might be too little, too late to satisfy regulators and lawmakers. British news outlets are predicting that the issue will receive fresh scrutiny when the Swiss parliament meets to discuss banking regulations before voting on changes aimed at reducing risk among banks deemed "too big to fail."