In the week of the Vickers Report, what better evidence that investment banks and retail banks should be separated?
Following in the ignominious tradition of Jerome Kerviel and Nick Leeson, a 31-year old man has been arrested in London in connection with rogue trading which has cost UBS $2 billion (£1.3 billion). You can read UBS CEO Oswald Grübel's memo to staff below.
In some ways, this is almost fortunate (for us, not for UBS, obviously). In the week of the final Vickers Report, what better evidence that investment banks and retail banks should be separated? UBS does not have a retail operation here beyond its private bank, but the danger posed to one half by the other is clearer than ever. Advocates of banking reform will be giving three cheers.
Questions are already being asked about how, in the post-credit crisis era when internal regulation should have been tightened, he could have got away with this. In Leeson's case, there was a hidden account (88888, a lucky number to the power of five to the Chinese), and in a recent edition of Radio 4's The Reunion, he blamed a lack of technological understanding in his old-school bosses.
No such excuses can surely be offered now: if bosses don't understand technology, they at least understand that they don't understand it and have divisions of people who do. There are compliance and IT and reconcilation departments devoted to making columns of figures agree. What was their role here? Did they miss something, or is the rogue trader (whether the arrested man or not) much smarter than they?
$2 billion is a bite out of UBS's capital cushion, though not enough to provoke mortal concern, and it may take them into the red for Q3, but much more important is their reputation. It is not as bad as it could have been – 'no client positions were affected', says Grübel – but fraud on this scale makes UBS look amateurish. Why trust it for your IB services now? It is unlikely that, say, Credit Suisse are rubbing their hands – they should be taking a dose of 'there but for the…' – but more business will surely flow their way now.
Oswald Grübel's memo to staff (from FT's Alphaville blog):
We regret to inform you that yesterday we uncovered a case of unauthorized trading by a trader in the Investment Bank. We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated, but we currently estimate the loss on the trades to be around 2 billion US dollars. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.
We understand that you have already had to contend with unfavorable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm. We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times.
We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened. We will keep you updated on the progress of our investigation.