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Making Molehills Out Of Mountains

It’s a convenience for big banks like UBS to get away with risky leveraged trading by blaming rogue traders…

‘UBS’s rogue trader loses 2 billion dollars’, say the headlines. The rogue trader has been arrested, UBS has made appropriately contrite noises about risk management and internal controls and the world’s financial press is treating the whole thing like an unfortunate accident. Somewhat like an air crash—it shouldn’t have happened, shows problems in training and safety systems and so on but what the hell, it’s the occasional price that has to paid for the convenience of air travel.

It’s interesting, this rogue trader phenomena. What do you think are the chances of seeing this headline. “Rogue trader makes massive profit but sacked for violating risk management guidelines.” If the big global banks have traders who are prone to going rogue, then sometime or the other the rogues must be coming good and making money on the kind of scale that they sometimes lose. What happens then? Does the bank sack the rogue and donate the profits to charity? Or does it quietly pocket the moolah and raise the trading limit given to the profitable rogue? One can only guess.

How about this headline? What do you think are the chances of seeing this one? “Rogue industry continues to endanger global financial system. No end to making leveraged gambles while being underwritten by governments”. Remember, this UBS was one of the TBTFs (Too Big To Fail) whose failure was threatening the financial system back in 2008. It used USD 75 billion of special aid from the US Federal Reserve at the time. Like every other bank, it was supposed to eschew risky prop trading and focus on client-centric businesses. The issue is actually much bigger than one rogue trader.

It’s such a convenience. Do all the risky leveraged trading that you’d like to. When things go bad, blame some rogue and wait for a public rescue. Meanwhile, individual investors must feel that it such a pity that they can’t blame their losses on any rogues except themselves.