The Real Rogue Traders
Kweku Adoboli lost some $2.3bn for his employer, Swiss bank UBS. A couple of years ago Jérôme Kerviel lost over $6.5bn for Société Générale, while a dozen years back, Nick Leeson cost Barings $1.3bn and their independent existence. In all, around $10bn of losses were accrued by these three nice young men who were no doubt the pride of their parents. $10bn may seem a lot, but it’s less than a billion a year – a small price to pay for the continued freedom from regulation which enables investment banks to continue their rogue trading, which is hugely profitable for them, even if it costs the rest of us an arm and a leg.
One of the recent articles on Adoboli’s exploits, suggested that banks had failed to learn lessons and had not controlled individual traders effectively. Another suggested that securities had grown in complexity making it difficult to assess the trading risks involved. The internal risk controls within UBS were said to be obviously inadequate. The same was said about Baring’s in its day. But UBS, Société Générale and Barings, seem pretty typical members of the investment banking community. UBS may have differed slightly in requiring its female employees to wear flesh coloured underwear, but otherwise they seem fairly normal. The lack of risk control in investment banking must be endemic.
When a trader’s bets come good, no-one complains. But when they turn bad, and the trader is allowed to persevere in the belief that their luck must change, and it doesn’t, the individuals are designated rogues. Then the City of London police tear round to their homes, sirens blaring even at three o,clock in the morning, to make an arrest, as though targeting some latter day incarnation of the Boston strangler or Yorkshire ripper. But Adoboli and friends are not like that. They’re just nice young men, doing what they do, not very well, and making a few bad judgments.
UBS boss Oswald Gruebel said he took ‘full responsibility’ for Adiboli’s trading loss, though he stopped short of offering himself to the police. He claimed to feel no personal guilt. Why would he? Bank bosses are not personally involved in the individual trader’s decisions. They necessarily delegate that responsibility. Trading in deliberately opaque securities is not based on detailed analysis for which the bank is responsible. Decisions are made in milliseconds on the basis of the trader’s personal conviction. Or they are automated. There’s no time for hierarchical control or responsibility to be exercised. Even the City of London police might baulk at arresting a computer that traded ultra-fast losses. But it might not be beyond them to arrest the nerd who wrote the software algorithm which took the trading decisions.
Traders and bank bosses are captive in a system which is out of control. It may be satisfying to see some fat cats lose their bonuses, but that is not of real significance. The bigger picture is one of investment banks making massive profits out of deliberately opaque products, inevitably and deliberately creating speculative bubbles. When the bubbles burst we all suffer. The taxpayer has previously had to bail out the banks, and it’s not at all clear how the proposed ring-fencing will prevent that being the case again in future.
What is not generally given much coverage is the damage done to the real economy, and therefore the general population, while the speculative bubbles are inflating. During that period, while bankers are taking their massive bonuses, money is sucked out of the real economy, manufacturing and non-financial services, to be put in the hands of traders like Kweku Adoboli and his friends. Because they are allowed to trade without effective control, the real economy is unbalanced while the bubbles inflate, and destroyed when they burst. That general effect is far more important than a few young men getting their bets wrong.