They $2 billion hit of UBS is being called the work of a “Rogue” Trader. This is a false and misleading statement. Why?  Because there are no rogue traders — just as there are no predatory borrowersthere are only rogue banks.

Here’s a news flash: If you issue credit, your working assumption MUST BE that there will be people who are not qualified who will try to borrow money. Your job each day is to separate qualified borrowers with the capacity to service that debt from the unqualified borrowers who do not have that ability.

Similarly, if your are in the business of using leveraged capital to speculate, then you MUST KNOW there are some people who are not competent to do so. Some of your employees (traders) will take losses, and in some cases enormous (but manageable) losses before moving on to other professions. A small few, however, may try to hide their inabilities. YOUR JOB is to separate the qualified from the unqualified, and to watch over the full lot. Thus, you establish trading limitations, leverage constraints, risk parameters.  Traders have to stay within their money lines, maximum draw downs, loss limits, etc.

Thus, Firms that highly leverage their capital in order to put it into the hands of a few 1,000s employee speculators have a crucial job: They must ensure that capital is being precisely and properly managed. They must also make sure that risk levels are tolerable, that proper controls are in place, that their IT systems and internal technology can track what is happening, in as near to real time as possible.

This is not easy. It is a complex, difficult set of processes that requires constant vigilance. It must be reflected in the corporate culture from the top down. And, it becomes more and more complex as the size of the organization grows. The assumption MUST BE that EVERY employee is a potential rogue trader. (I was a rogue trader, but that’s a story for another day).

Anyone who runs a shop that has a proprietary trading desk is obligated to do everything in their power to prevent a single employee from bringing down the company. Indeed, everyone who earns their bonus by risking firm capital is a potential disaster. A rogue trader with massive losses is a sign of complete and utter failure BY THE BANK’S MANAGEMENT. It means that the supervisory functions have failed. That the ability to track what is occurring is not happening, certainly not in real time. In the case of the UBS London trader, he hid the losing trades for 3 years (so much for real time supervisory tracking).

That represents an utter failure of management.

Hence, the arrest of a so-called rogue trader is actually a red flag that the firm is not up to the task of discharging its internal oversight obligations. It is not being run properly — indeed, the discovery of the fraud is in fact a company admission of a poorly managed, failing organization. Senior management must be held equally as responsible as the trader. They may not have committed the same legal fraud (in hiding the trades), but they certainly should be sacked for their gross dereliction of duty.

Understand what this means within the broader context of our financial sector’s not so innocent foibles: Any firm that hires Robo-signers is just as bad as a firm that has rogue traders. Both actions are an indictment, an admission of failure and of managerial incompetence. Each represents a crucial failure of risk management, of legal compliance, of the ability to do their jobs safely AND within the law.

Why is this of interest to public policy makers? UBS’s failure to identify and prevent their rogue, just as Citigroup’s and Bank of America’s foreclosure frauds, are all part of a broader gallery of errors, omissions, foibles and illegalities.

In an era of bailouts on the backs of the taxpayer, it points to a simple reality: Firms must decide whether they are going to sacrifice profits in pursuit of safety, or sacrifice safety in pursuit of profits. Whatever they decide, however, it is not the responsibility or obligation of taxpayers to backstop these choices.

Consider the choices made by management: The collapse of firms such as AIG, Bear Stearns and Lehman Brothers were caused by the same sort of poor judgement as UBS’s $2 billion in losses. Only the rogues gallery there were the senior-most managers of the firms. Ace Greenberg exhorting his staff to focus on reusing paperclips, while the Mortgage Syndication division lost $100s of billions means that Ace had gone rogue; Dick Fuld surrounding himself with Yes Men while the firm’s leverage and risk exposure went through the roof also marked him as a rogue. Tom Savage, President, AIG’s Financial Products, calling derivative underwriting “Free Money? Yet another C-level rogue in a corner office.

These are the Rogues who belong in jail — the executives, managers and boards that recklessly pursued profits REGARDLESS OF RISKS. Their failures point out who the true threats to society are.

Paul Volcker, arguably the greatest Central Banker in history, has persuasively argued that proprietary trading should not be part of the insured depository banking sector. I utterly agree with Fed Governor Thomas Hoenig, who has described the banking sector as “more akin to public utilities” than independent entities. Want to be independent to pursue proprietary trading? Let’s drop their FDIC insurance and see how far their reputations carry them.

The next crisis — the one AFTER the present one in Europe — is where I expect to see the ultimate damage wreaked by rogue bankers.

The prior bailouts have created a moral hazard, where leveraged speculators and rogue bankers know that the state will bail them out. This is unacceptable. There is no reason that taxpayers should be responsible for ANY rogues, be they traders or bankers.


Excerpts from current press after the jump.

See also:

Martin Wolf, Of course it’s right to ringfence rogue universals (

Thank you, UBS. As a member of the UK’s Independent Commission on Banking, under Sir John Vickers, I could not have asked for a better illustration of the unregulatable risks to which investment banks are exposed than Thursday’s announcement of a loss of $2bn in “unauthorised trading”. No sane country can allow taxpayers to stand behind such risks.

That is the kernel of the case for ringfencing of retail banking from investment banking, recommended in the ICB’s final report. As John Kay argued on Wednesday: “Only if traditional retail banking is ringfenced can taxpayer guarantees be limited to personal and business depositors, and government funding of the banking system be directed to the needs of the businesses that create jobs and growth. That is the irrefutable case for the Vickers Commission recommendations.”


Matt Taibbi: The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass (Rolling Stone)

They’re not “rogue” for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys “rogue traders” when they make a billion dollars gambling. The only thing that differentiates a “rogue” trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG’s Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn’t an investment banker, technically – but he was in financial services).

In the financial press you’re called a “rogue trader” if you’re some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you’re a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book. In other words, “rogue traders” are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.


UBS bankers face zero bonuses (The Financial Times)

Thousands of UBS bankers could receive zero bonuses this year following the revelation that a 31-year-old trader at the Swiss group is suspected of losing $2bn through unauthorised trades. Kweku Adoboli, a trader on the bank’s little-known “Delta One” desk, was still being held at Bishopsgate police station in London after being arrested in the early hours of Thursday morning on suspicion of fraud. City of London police said they had obtained a 12-hour extension to continue their interviews after the standard 24-hour period had elapsed. Analysts said that while UBS has enough capital to withstand the financial impact of a $2bn hit, such a massive trading loss could effectively wipe out any profits from its investment banking operations for 2011.

UBS Trader Gets No Miracle as Loss Leads to Arrest (

As Switzerland’s central bank imposed a limit on the franc’s appreciation against the euro on Sept. 6, UBS AG (UBSN) trader Kweku Adoboli’s Facebook profile had a plea for his friends: “Need a miracle.” Just over a week later, at 3:30 a.m. yesterday, police in London arrested the 31-year-old Adoboli on suspicion of fraud by abuse of position. UBS told investors less than five hours later that “unauthorized trading by a trader” it didn’t identify caused a $2 billion loss. Adoboli worked on the bank’s Delta One desk, a unit that handles trades for clients, typically helping them to speculate on or hedge the performance of a basket of securities. It also takes risks with the bank’s own money in arranging trades. It was the same kind of desk as the one worked by Jerome Kerviel, who triggered a 4.9 billion-euro loss ($6.8 billion) for France’s Societe Generale (GLE) SA in January 2008. “It couldn’t come at a worse time for UBS,” said Fred Ponzo, a former trader at Societe Generale and capital markets adviser at Greyspark Partners in London. “The thing is, it’s very hard to go through the fail-safes by error. The only way to dig a hole this big is by design. You have to ask the question that if this is a $2 billion hole, is this is a failure of technology and risk management?” The arrest as global regulators are pressing banks to curb their proprietary trading is likely to revive calls for financial institutions to increase controls on risk and separate their investment banking from their retail businesses. It may also force Chief Executive Officer Oswald Gruebel, 67, to abandon further expansion of UBS’s investment bank.


UBS’s Adoboli Admitted to Trades (WSJ)

Risk-control officers at UBS AG discovered unauthorized trades allegedly made by bank employee Kweku Adoboli, who in turn admitted to having made the trades, according to a person familiar with the situation.

Category: Bailouts, Legal, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “There Are No Rogue Traders, Only Rogue Banks”

  1. Orange14 says:

    BR, excellent post. I spent my career in the pharmaceutical industry where processes (albeit of the different sort) had to be carefully controlled and accountability of individual employees was a necessity. Deviation from SOPs was a firing offense. We have so many examples in the financial services industry of either violation of SOPs or a complete lack of them. I don’t expect Glass-Steagall to come back any time soon and the future of even Dodd/Frank is now subject to political whims. We have not cleaned up the mess that the the last 20 years has brought us and it’s crippling us.

  2. denim says:

    This is all in keeping the laissez faire myth alive and well, i.e., we are all honest dog eat dog capitalists policing our selves. When the Randian Greenspan ran everything nobody ever did anything like this. And the self policing worked very well. Until TARP messed it all up, those that should have gone bankrupt were going bankrupt at warp speed. Now we see them going under slower…but only slower.

  3. Moss says:

    The Culture is rogue because the system is rogue. The system is rogue because they get bailed out.
    How many times must it happen?

  4. Typo

    Hence, the arrest of a so-called rogue trader is actually a red lag

    I think you mean red flag though lag could work well in that context also.

    This is an excellent piece and I assume it is shaping up to be your next hard hitting Washington Post column. If that is the case then that is a fantastic bit wordsmithing for the senators to peruse while they consume their cereal.


    Greenspan was the father of this rogue culture. Bernanke is his protege that is only taking it a little father than his teacher took it. Nothing has changed since Greenspan took the reins except that their mistakes are bigger and our ability to pay for them has shrunk

  5. Tahoe says:

    Superb Barry. Thank you for your excellent work. Agreed, the culture must be from the top down. In my view, for the purpose of instilling certain principles and values that are intended to establish/maintain “the” culture. The loss of trust and confidence over the past three years is a clear signal to me that something very fundamental must change. Thanks again.

  6. louiswi says:

    Excellent Post Barry! Keep it up-please.

    I’m reminded of what Al Swearengen once said: “once we murder a couple of these co#ks#ckers, the problem will go away”.

  7. BusSchDean says:

    Thank you. Poor management is the linchpin of most failed companies — they are called “managers” because they are supposed to actively manage the trade-offs in full light of day.

    I have yet to speak with a business owner or C-level executive who doesn’t want business school graduates to be responsible people willing to be held accountable for his/her actions. Yes, they want bright, ambitious young people ready to hustle to find and pursue opportunities, but literally to a person employers say they believe in accountability, until, it seems, it happens to them.

  8. Winston Munn says:

    Rogue Trader – (sung to the tune of Dream Lover)

    Every night I hope and pray
    A rogue trader will come my way
    We’ll really rake in the dough
    but he’ll be blamed when it blows
    ’cause I want (yeah-yeah)
    A guy (yeah-yeah)
    To blame (yeah-yeah)
    It on (yeah-yeah)
    I want a rogue trader so I won’t be in jail alone

  9. dead hobo says:

    BR offered:

    Similarly, if your are in the business of using leveraged capital to speculate, then you MUST KNOW there are some people who are not competent to do so.

    Please define competent speculation. It can’t depend on making a profit because all speculators lose money. If you follow ‘investment science’ then you are someone who reads books that quantify the unquantifiable, but make it look scientific. I once read the CFA book 5 on equity investments and bonds just for grins. While the bond stuff was lightweight but interesting, the equity stuff appeared to be a cult initiation into quantifying the unquantifiable, but making it look like there;s a science behind it. It went in the trash afterward.

  10. streeteye says:

    Absolutely, management is responsible. If a big loss goes undetected past a settlement date when cash has to move, past the two-week mandated vacation many banks enforce when you can’t touch the books, past the annual audit, it’s a sign of something seriously wrong.

    And the robo-signers, stated-income loans are a sign of systemic cultural rot.

    But taken to the extreme, this could be a bit like saying, ‘any security flaw in Windows is a sign Microsoft really doesn’t want to be secure’ or ‘any incidence of crime or social dysfunction is a sign society doesn’t really want to take the necessary steps to prevent it’.

    Madison said – “To suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical idea.” You have to put some level of trust in people to do their jobs. Otherwise companies become even more bureaucratic and stifling than they are.

    But as you say, eternal vigilance is the price, and the burden is on management to show they paid that price (which they clearly have a record of not doing), and they need to take the consequences.

  11. louis says:

    Absolutely, remember as we think about thinking about firing the first shot, They have created another product that the syndicate manager is ready to approve that will make your life one of continued bitterness.

  12. mitchw says:

    Let’s see hands of those who think Adoboli is the only trader at UBS who’s a ‘rogue.’ This went on for three years, and he’s the only one?

  13. teraflop says:

    This Rogue lost less money on authorized trades than what the firm accomplished with authorized trades.

    The definition of Rogue Trader is not that they lost money. They’re Rogue if they trade a contract, commodity, currency, equity, bond, credit or equity derivative, what have you if they’re not authorized to take on that position. They’re Rogue if the tenor of their trades is out-of-bounds. They’re Rogue if their daily P&L, whether positive or negative, is out-of-order. They’re Rogue if their VAR is out of order (e.g., zero). They’re also Rogue if they hold the trades, value the trades, calculate their own EOD delta, calculate their own VAR, publish their own P&L, and produce settlement statements out of order with counterparty expectations.

    Allowing Rogue operations is another problem, best solved by removing licenses until they beg.

  14. “…Want to be independent to pursue proprietary trading? Let’s drop their FDIC insurance and see how far their reputations carry them…”

    would be a nice place to Start, though, with..

    it, still, leaves the question of ~”The proper role, if any, of the Federal Reserve?”, yes?

    but, this..”There Are No Rogue Traders, Only Rogue Banks” is, no doubt, True.

    nice article, BR

    some things are worth re-reading..

    “…The prior bailouts have created a moral hazard, where leveraged speculators and rogue bankers know that the state will bail them out. This is unacceptable. There is no reason that taxpayers should be responsible for ANY rogues, be they traders or bankers…”

    though, We’re missing the Link, no?

    isn’t it, the Link, the Federal Reserve’s, wonderfully, ‘useful’, Elastic Currency?

  15. “isn’t it, the Link, the Federal Reserve’s, wonderfully, ‘useful’, Elastic Currency?”

    given, of course, the “Legal Tender”-status, bestowed upon it by their Partner, in their duopolistic Crime, the USGov..

  16. vjrdataman says:

    Excellent post BR. And being in the IT area (architecting, designing and developing backend systems, i.e. databases) the business rules can be built into the backend of systems to keep these things from happening. Plus you make sure that reporting to risk management is timely and good quality. If this is done Senior Management has no excuse. I am sorry but I have way to much experience in this area to let the Senior Management off at UBS that this was a “Rogue Trader”. This is more like “Rogue Management” who must be shown the door!

  17. RPL says:

    Barry, a simple comment. Note that when investment banks were partnerships this didn’t really happen. That is because ownership of the firm in that instance created a self-policing environment where senior partners made sure there were no more “rogue traders.” You have it exactly right, there are no rogue traders only rogue firms, and by allowing them to become publicly traded we incentivized the creation of rogue firms as a business model. Re-instituting a separation of investment banking from commercial banking is almost certainly a good idea, but probably not sufficient absent a requirement that investment banks return to partnership structures.

  18. TedDogRun says:

    Republicans are rogue fiduciaries:

    Terrific, Barry! I am a conservative and, like many others, I am dismayed by the republicans. I vote for them primarily as an anti-union vote, but I am continuously disappointed by their actions. Many of them are rogue fiduciaries of their constituents rights and interests. (I know it is laughable and naive to have such expectations for our elected legislators.) Obama is using his term in office to boost the power of the unions as much as possible, and he is sadly misguided to believe that stronger unions and higher union memberships is what America needs. As a conservative, I wish I could be hopeful that the republicans could develop the appropriate approach to bank regulation, but I know otherwise.

  19. theexpertisin says:

    Excellent post.

    Summary: A fool and his money are soon parted.

  20. gloeschi says:

    I used to work on the trading floor of a European bank in the 90′s. Everybody was required to spend at least a day in the back office to get an idea on what happened to the trades afterwards. As I was shown around we came by the person in charge of keeping track of currency trades. She threw up her arms and complained about some numbers not adding up. “It’s negative, and it should be positive.” Jokingly, I recommended multiplying the result by “minus 1″ and went my way. Later that day we bumped into each other again. She was overjoyed and thanked me profoundly for my “solution”.

  21. GrafSchweik says:

    TedDogRun—I am an ex-conservative [21 years in the big, bad, real world beyond our borders will do that if one eschews ex-pat ghettos and learns the local lingo]. Sorry, but you’re not in recovery yet if you’re still mainlining that old canard that’s it’s all the unions’ fault.

    My god, man , look at Germany whose business culture proves how insubstantial your belief is let alone a universal law. Do you believe in the Tooth Fairy too?

    Look at the half century of appalling management by our corporate ‘elite’ in industry after industry and the expert idiots [from the German, 'Fachidiot'] produced by our equally ‘elite’ business schools.

    If I had a wand and a Hogwarts education, you’d spend the next 5 years working in a unionized, privately owned manufacturer in the German Mittlestand. That would cure you of such foolishness… ;-)

  22. streeteye says:

    You do realize, of course, that this ‘rogue trading’ is all the fault of the librul government regulators? Dick Bové connects the dots:

  23. Ridge Runner says:

    I would put it differently: sure there are predatory borrowers and rogue traders, but the responsibility for screening out the former (as well as the merely clueless and otherwise incompetent) in the underwriting process, and the latter in the trading desk risk management process rests with management. Moreover, if management knowingly employs incompetent and/or crooked underwriting and risk management staff, and incents them in a variety of forms to “look the other way” when manifestly fraudulent transactions are close, then the top management are bigger rogues and predators than any of their underlings, and should be sanctioned far more severely.

    In the Navy, as I understand it, the commanding officer of a vessel that runs aground has just experienced a career-ending event, regardless of how that event happened. Depending on the details leading up to the failure, further sanctions are applicable, but minimally the officer will never command another vessel for the Navy. A similar scale of sanctions should apply to fiduciary institutions. Until it does, along with the other restraints on gambling with depositors’ assets suggested in the post and many of the comments, prudent investors and savers should keep their assets, preferably “hard” assets rather than banker IOU’s, in the Bank of Sealy or the Bank of Mason (between mattresses or in canning jars buried in the backyard – and I’m only half joking).

  24. ToNYC says:

    The next crisis — the one AFTER the present one in Europe — is where I expect to see the ultimate damage wreaked by rogue bankers.

    I did not see any mention that this is the same Crisis. The cure money ends up coming from the magic currency swaps they began in 1985 via James Baker and Plaza Accords. Only systemic cures will work for viruses that mutate to survive. Language without direct consequences is fiction.

  25. Greenspan screwed us says:

    The entire global financial system has morphed into one big “Rogue trade”…………

  26. indiainc says:

    Have you ever noticed that there has never been ONE “rogue trader” who made money for a bank? Or at least one trader identified as such. Therein lies (a big part of) the problem. As long as the trader “makes” money, he is not a rogue. As soon as he or she (there have been no female “rogues” yet, but one has to assume it is a lack of opportunity) loses money, they become rogues, and someone in senior management comes out and says that he is “shocked, shocked, that there is gambling going on in this establishment”.

    There appears to be a lot of misunderstanding, I think deliberate, in the reporting on what Delta One does at most banks. I have not seen anywhere, yet, the real function of delta one, which is regulatory and tax arbitrage. Why would a hedge fund manager buy ETFs synthetically from a delta one desk? Because they can post less capital than they would if they bought the ETFs directly, or if they bought futures, where such futures trade. The other use for delta one is tax arbitrage, sometimes dividend related (the beneficial owner is not eligible for a tax credit, or a lower tax rate, and a convoluted series of transactions between various on and off-shore entities is constructed to allow them to benefit; with the intermediating bank taking a “little” for itself). Entire armies of lawyers make sure this is structured “legally”. Please note that I do not imply this is ethical, merely “legal”. As we all know, that’s not necessarily the same thing.

    Delta one traders are, and I fear that I will give offense but so be it, the dimmest wattage bulbs in the generally low-wattage equity derivative universe. I would have difficulty getting the correct time of day from most of them. I would definitely not allow them to take risk, ever. By and large, they are allowed to take futures basis risk and very little else, not even risk on dividend payouts or execution risk. For this sort of risk-taking to happen, there had to be widespread collusion in the bank, over a long period of time. I could go on and explain why this is true, and how the process works or should work, but this is not the right forum and I fear I have already exceeded most people’s attention spans.

  27. DuchessGateau says:

    So well said! Too bad they’ll never print it in WaPo, but that would undermine the entire purpose of using “Rogue trader” headlines in the first place. I won’t be surprised if a network of rogue traders is discovered at every insolvent bank.

    But it’s OUR central bank who bails out UBS, so why suddenly no bonuses? How weird. That’s not like us. Has something changed? UBS tapped into our Fed for billions, but now for some reason they must finagle another way? Hey, is this because of Mark Pittman’s lawsuit? Whatever happened to secret charity for Swiss bankers? Servants and chateaux don’t pay for themselves, you know.

    It may all get resolved in the details of the latest Fed swaps with the EU central bank.

  28. AlexM says:

    Taibbi nails it again. Only the rogue “traders” get prosecuted, the rogue “CEO’s” who have the capability to bring down the entire world financial system escape almost unscathed.

  29. [...] No Rogue Traders, Only Rogue Banks [...]

  30. [...] are no rogue traders, only rogue banks.  (Big Picture also WSJ, Marginal [...]

  31. endorendil says:

    The banks do a very good job picking people whose faulty interpretation of the world works *right now*. They do an excellent job kicking out those people when their mistakes start to hurt their performance. The few they don’t catch are outed as “rogues” but they’re just the ones that fell through the cracks. Banks don’t understand short-term investments. Traders think they do, but they’re just wrong in the right way for a while.

  32. KevinTren says:

    Can’t remember where I read this but it seems fitting for this topic: “”Nobody blames the tiger for stalking its prey, but you do blame the zookeeper for leaving the tiger’s cage open.”

  33. DeDude says:

    As the banks go through rounds of cuts to become more profitable they also cut out most of the controls of how their money is being shuffled and gambled with. A few years later the cost of those cuts become evident. But by then the CEO has already harvested his fat bonuses so he is not the one hurt. OH the wonders of rouge capitalism.

  34. andrewp111 says:

    2 billion is nothing! I’d like to see a rouge trader lose a trillion.

  35. kaelb says:

    Its a new risk (mis)manangement policy at the banks. Suffer a big loss (anything in the billions will do), blame a rogue trader. If there had been a $2 bil + profit, does anyone think this guy would be facing charges or would he just be receiving a bonus.