October 2012 and the latest rogue trader, Kweku Adoboli, whose antics led to UBS losing some $2.3B is in court. And, the dirty laundry is public and to the experienced nose, it sure seems we’ve had this before and for sure there was a warning.
Let’s start the week with a history lesson. 1994. The US brokerage firm, Kidder Peabody, then a unit of GE, declared it had lost some $350 million. The loss was caused by a government bond trader, Joseph Jett. Now the case against him was later dismissed, but it was too late for Kidder Peabody. Long story short, young Mr. Jett had been making enormous profits in a business that normally made very modest P&L; treasury bond strips meant dividing up a US government bond into its component parts, the principal part and the interest part. Jett created so much volume and so much P&L, that his bonus went from $5’000 in 1991 to $9.2 million in 1993, a sum that needed GE main board approval. Beans were counted, but not questioned. On investigation, the verdict was:
“Jett was provided the opportunity to generate false profits by trading and accounting systems,” Mr. Lynch wrote. “It was his supervisors, however, who allowed Jett that opportunity for over two years because they never understood Jett’s daily trading activity or the source of his apparent profitability. Instead, their focus was on profit and loss and risk-management data that provided no insight into the mechanics of Jett’s trading.” (For the long story, see Wikipedia)
In early 2008 a trader at Societe Generale, Jerome Kerviel, managed to run up losses of €5B. Just after that, the management at UBS sent out a memo about “Red Flags” and what type of warning signals to be on the look out for. (see, the Times of Oct 23rd 2012, “Bank warned Adoboli and others on trades”):
“Staff were alerted to warning signs of possible unauthorised trading and told that any “unusual or questionable activity” should be reported for investigation. These ‘red flags’ included a large amount of “errors, fails, cancels [and] amended” trades and “a trader or business that is generating an unusual amount of profit/loss”, the e-mail stated”
Lessons Learned: In summary, ladies and gentleman of the jury of public opinion, this case is all about “normal”. If you know what is normal in a business, you will ask questions. Asking questions is a necessary part of daily operational life.
For more examples, see previous posts titled “Normal” at the start of the Blog post series.
A personal request: Comments and feedback from regular readers are very welcome. Thank you for each and every one of them. If you find this Blog useful, please subscribe. There is an E-Mail tool and an RSS link on the right hand side of the main Blog page. If you like it enough to share, please share this with a friend or two and ask them to subscribe too. If I am wide of the mark and not offering anything of use, please comment or contact me directly via E-Mail.