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UBS Banking Scandal Sheds Light on Big Bankings’ Culture Problems

Posted in Banks and Financial Services

This week the trial of former UBS trader Kweku Adoboli, arrested in September 2011 on charges of fraud and false accounting, takes center stage in the banking world.  Adoboli was arrested in connection with a $2 Billion trading loss at UBS in 2011.  Adoboli had been contacted by compliance officers with questions about some of his trades.  He refused to respond, eventually admitting he could not answer the questions.

The regulators’ questions related to fake trades Adoboli allegedly recorded to hide his investment losses.  Adoboli is accused of creating several separate accounts to form an “umbrella” that hid profits and losses from his unauthorized activities.  As director of exchange-traded funds, Abodoli handled packages of funds for various firms.  These funds are generally hedged to lessen risk, but Adoboli took a different approach; He rarely hedged any of his trades.  This exposed UBS to large profit and loss risks.  For a while, UBS was lucky and collected large profits from Adoboli’s risky strategy.  When a large number of Adoboli’s trades went into the red, questions started coming from the back offices of UBS.

I have to wonder how, in a large international bank, which is constantly under scrutiny, the bank could have no idea that an employee was conducting risky trades that could lose the bank (and its customers) more than a billion dollars.  In fact, the New York Times reports Adoboli’s defense counsel’s statements, which suggest that not only did management know what Adoboli was doing – they condoned it.

But if Adoboli’s managers knew he was conducting risky trades that could lose the company billions of dollars, why didn’t they do something about it?  Easy to answer: money. Adoboli began by making millions of dollars: the first year, UBS allegedly made more than $8 million off of Adoboli’s trades.  In the second year, they made around $50 million per quarter. On one particularly lucky day, the bank netted $6 million from Adoboli’s trades alone.  With that much money pouring in, it’s easy to see why management was willing to turn a blind eye.

But now the game is up and only Adoboli stands in the courtroom.  His managers are not being prosecuted, despite years of allegedly condoning his actions. In court today, his defense counsel likened his fall to that of Spartacus.  Instead of refusing to let a single person take the fall, as occurred in the Spartacus story, Adoboli’s defense counsel said Adoboli’s managers and coworkers let him take the fall for a loss they all had a role in:

“Mr. Adoboli stands up and says ‘I am Spartacus’ and the other three stand up and said ‘yes, that’s him!’

Only in a company that values profits over ethics could this kind of widespread fraud occur.  The banking world is increasingly looking at laws and regulations as a math game, is it more profitable to break or follow them?  When it looks to be worth the risk, banks are willing to blatently disregard the rules in their quest for profits.  Rules exist to keep consumers, and the economy as a whole, safe from the kind of greed that drives most big banks.  If that greed runs so deeply through the company that breaking the law is simply considered to be the cost of doing business, without respect for why those laws and regulations are there in the first place, what other options do regulators have for protecting the banks from themselves?

We’ve heard Paul Volcker advocate for splitting big banks into investment banks and service banks; separating the profits-at-all-costs mentality of investors from the customers-first mentality that banks should use when providing basic financial services to the public.  This latest case is just one more drop of water in the bucket of stories about bankers behaving badly.  After all these banking mistakes, which have cost banks, consumers, and sometimes even cities, large amounts of money, isn’t it time for something to change?  Isn’t it time for real banking reform?  Let’s hope that those implementing Dodd-Frank have come to this realization.  Lead on, Paul Volcker.  We’re ready.

Assisted by Jill Fitzgerald