UBS £1.3bn rogue trade: have we learnt nothing?

THE ARREST this morning of a suspected rogue trader, Kweku Adoboli, at the London offices of Swiss banking giant UBS has shocked the City. It is understood UBS has taken a £1.3bn hit – bigger than that famously suffered by Barings in 1995 when Nick Leeson blew £827m. It could spell the end for the troubled Swiss bank – and it's also bad timing for bankers reeling at the proposed reforms in the Vickers Report.
 
A boost for ring-fencing

The news will have bank bosses reaching for the hard stuff, says Jonathan Sibun in the Daily Telegraph. "If ever there was an advertisement for splitting retail banks from investment banks, here it is. Looking for an example of casino banking? Voila!"

Politicians from Vince Cable to Ed Balls will jump on the story to reinforce the Independent Commission on Banking recommendations that retail banks should be ring-fenced from investment banks, writes Sibun. With UK banking chiefs due to meet with George Osborne to argue their case and keep politicians from rushing through any changes, "this episode will help them like a hole in the head".

The end of UBS

And it could be the end of UBS, says the Evening Standard. The losses racked up by a rogue trader "could prove to be the catalyst for the Swiss regulator to close down the loss-making, gaffe-prone investment bank".
 
Huge losses sparked by the sub-prime crisis shocked UBS shareholders, angered the Swiss public and triggered an identity crisis for the bank when they first became public in 2007. Since then, the bank has "hobbled along", drawing on its huge reserves of loyalty built up as an investment bank. "But the rogue trading loss proves that UBS has learnt nothing from the crisis, one of the central lessons of which should have been that risk management remains at the heart of any investment bank."

Proof that OTC trading is risky

So, where were the risk managers, ask Philip Stafford and Jeremy Grant in the Financial Times. UBS's announcement "threw up more questions than answers". And they were awkward questions too. UBS claims it cannot even identify the area in which the rogue trades were made and it seems that senior management were unaware of the issue until recently, despite daily risk management meetings.
 
But despite a slew of new regulations, and new technology that can monitor trades and risks in real-time, there is an "uncomfortable fact", write Stafford and Grant. OTC trading, which appears to be the sort of trading involved, and which is often done over the phone, gives traders lots of discretion. This is a gift to those who have long criticised OTC trading as opaque and inherently risky. "It is hard to disagree." ·