Three years to the day that Lehman Brothers collapsed another rogue trader scandal has hit. Thirty one year old Union Bank of Switzerland (UBS) trader Kweku Adoboli is accused of losing £1.3 billion. Following on from such luminaries as Jerome Kerviel who lost £4.3 billion for Societe Generale in 2008 and Nick Leeson who gambled and lost £827m and effectively collapsed Barings Bank in 1995, Adoboli was last reported as updating his facebook status to “Need a miracle”. In the absence of that miracle Adoboli was arrested at 3.30am on fraud charges (15th September).
Post Leeson and Kerviel the major banks have ramped up their risk management operations. All serious players have teams of accountants poring over trading and position data looking for overbought positions and potential disasters. They also seek to keep traders within reasonable risk positions against agreed trader limits. It is a losing task and runs counter to the whole ethos of modern “banking”. The industry in recent years has been transformed from the conservative role of money management, cautious lender and trusted advisor for corporate finance to out of control derivatives gambler. Risk levels have ballooned and much banking business is now centered on proprietary trading (trade on their own book rather than for clients). The pressure on traders to out perform is enormous as are bonuses when they win. The temptation to take ever greater “bets” grows and compensation rules encourage it. Traders will earn relatively small base salaries with giant bonuses for those that can take big risks and win big.
The whole structure of the industry is sadly out of control. Speaking on Channel 4 news (15th September) former City Minister Lord Myners who has held numerous city directorships was scathing in his attack on today’s banking industry:
“I question whether much of their (banks) activity has any social or economic utility at all”. He went on to describe how risk levels continue to be dangerously out of control: “Bank assets went from 50% of the UK’s GDP to now being more than 600%”. The “assets” which Myners refers to include all manner of derivative contracts which owe more to high risk/high return trading than traditional banking assets of loans, deposits and mortgages. Adoboli was trading highly contentious synthetic ETFs (exchange traded funds) in this world of high speed, high return trading – banks take positions and give assurances over made up products which are not grounded in the actual markets of shares, commodities, bonds and so on. The original idea was that derivatives would reduce exposures and risk but the opposite has happened. This derivative market is now 20 times the size of the total worlds economy which means that relatively small market movements are greatly exaggerated in this “virtual” made up derivative world with consequent enormous gains (for some) and catastrophic losses (for others).
If UBS and others are happy to gamble their businesses away in these precarious products, then one may say let them fail. But the problem is far wider than that. Under the banner of “too big to fail” Western governments have taken it upon themselves to bail out these failed companies. The fact that banks hold the common man’s current accounts should never have clouded the fact that if you gamble and fail then no government should use public money to bail you out. The Swiss government as recently as October 2008 bailed out UBS to the tune of $5 billion, while also guaranteeing $60 billion of “distressed” assets. The official response to the financial crisis was to give a green light for the banks to “gamble” their way out of trouble. Nothing has changed and the extreme risk taking culture remains.
This past week the UK government released the long awaited Vickers report into reform of the banks. Its 360 pages can be summarised as: business as usual, although (following Banker consultation) they would like to separate retail banking from investment banking and then remove some (up to 60%) of the publics responsibility for backing up failed/failing banks. It is scandalous that the report recommends that its limited objectives can only be implemented by 2019. So hundreds of billions can be put on the taxpayer’s neck over a few mad days in 2008, but we are told that essential reform to banking takes 11 years (3 years preparing this report, and another 8 until 2019 to implement).
Myners has also questioned why Vickers depended on bank provided estimates on the costs of the reforms and criticised the lack of radical thought going into its recommendations with little or no analysis of the causes of the 2008 crisis. The crisis continues and western economies remain severely depressed – Myners estimated the hit to GDP in the UK caused by the bank bailouts was 8% over the past 3 years. It is sad that analysis of the hold which banks exercise over governments, the rise of gambling derivative products which serve no useful purpose other than enabling enormous amounts of wealth to be passed to the winners of the bets, and a plethora of dubious trading practices (short selling, highly leveraged trading, securitisation of debt, high frequency trading to depress key markets, and development of monopoly situations) have all been glossed over, and continue to be.
UBS trader Adoboli will be pilloried and paraded, but the real rogues continue with official approval and with a green light to continue (and with the benefit of the public purse to subsidise their positions). What madness.
Traditional business practice dictates that partners share in rewards and risks, in fact Islam requires that losses be shared strictly in accordance with the capital of the contracting partners. If losses will be underwritten by the taxpayer there is no incentive to curb risk taking, the situation can only get worse and dramatically so.