Issue of the week: Do banks breed rogue traders?

last updated 8 January 2015

The timing for the banking industry couldn’t be worse, said Francesco Guerrera in The Wall Street Journal. A new rogue trading scandal surfaced last week, as 31-year-old trader Kweku Adoboli was charged with losing $2.3 billion of UBS’s money without the Swiss bank noticing. The arrest is sure to “strengthen the hand” of regulators who say investment banks still aren’t capable of policing risk. It’s unclear at this point how Adoboli, who executed large-scale trades at the bank’s London office, dug himself into such a massive hole. But since he was arrested three years to the day after the collapse of Lehman Brothers, it’s “almost irresistible to conclude that Wall Street has learned nothing from past mistakes.”

“Where were the adults?” said William D. Cohan in Bloombergâ€‹.com. It’s “nearly unfathomable” that a bank of UBS’s “heft, wealth, and importance” could let this happen in our post-crisis world. Either the Swiss bank looked the other way as Adoboli made massive, dicey bets, or its revamped risk-management department completely failed to do its job; both explanations are “equally appalling.” UBS is big enough to swallow the financial loss, said Jeremy Warner in the London Telegraph. But the damage to its reputation is so grave that its investment banking days may be numbered. Still, let’s be honest: We can’t be certain that rogue traders won’t be able to evade any rules that regulators devise, since they’re so adept at hiding their losses. Perhaps nothing in the end can “stop the determined rotten apple.”

Banks always say they’re the victims of bad seeds in cases like this, said Felix Salmon in Reuters.com. But they set themselves up for disaster in the first place by hiring “congenital risk-takers” and rewarding them with massive bonuses for taking big chances. “It’s a statistical inevitability that one or two of them will go rogue every year or so,” and banks shouldn’t be surprised. I’m sorry, but it’s high time we did away with the term “rogue trader,” said Matt Taibbi in RollingStone.com. We always trot it out when an investment banking newbie loses a few billion dollars in disastrous trades. But “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.” Those guys get the corner offices.