UBS loses $2 billion by a rogue trader

http://www.nytimes.com/2011/09/19/busine...llion.html

LONDON — UBS, the Swiss banking giant, said Sunday that unauthorized trades in index futures during the last three months were at the center of rogue trading that led to a $2.3 billion loss.

In a statement on Sunday, UBS said it failed to notice the trading of index futures on the Standard & Poor’s 500, the DAX in Frankfurt and the EuroStoxx because they were offset by fictitious positions that kept the transactions within the bank’s risk exposure limits. A London court on Friday charged Kweku M. Adoboli, 31, with one count of fraud and two counts of false accounting dating back to as early as October 2008.

“The true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader,” the UBS statement said. “These fictitious trades concealed the fact that the index futures trades violated UBS’s risk limits.”

In the statement, the bank’s first since it announced the trading loss on Thursday, UBS said that the total loss was higher than the $2 billion estimated earlier. It reiterated that no client positions were affected and said it had appointed an independent committee to start an investigation into the trades and the banks risk systems.

“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” UBS said. The bank has covered the positions and the equities business was again operating within its previously defined risk limits.

UBS confirmed that Mr. Adoboli’s trades started to unravel on Wednesday when compliance officers who “were reviewing his positions” led to the trader revealing his unauthorized activity. UBS then called the police at 1 a.m. on Thursday and Mr. Adoboli was arrested at 3.30 a.m.. He remains in police custody until the next hearing , which is scheduled for Thursday.

A spokeswoman for UBS declined to comment Sunday on whether the bank found evidence of fraud or false accounting beyond the three months during which the $2.3 billion trading loss was accumulated.

The charges against Mr. Adoboli raise questions about UBS’s risk management protocols and how such a large trading loss could remain undetected for almost three years.

In an interview with Der Sonntag, a Swiss newspaper, the bank’s chief executive, Oswald J. Grübel said that he had not considered resigning. “If someone acts in a criminal way, there’s nothing you can do,” Mr. Grübel said in the interview. He added that as chief executive he has “the responsibility for everything that happens in the bank” but that “if you ask me whether I feel guilty, I would say ‘no’.”

UBS said Sunday that David Sidwell, senior independent director at the bank, would lead the independent investigation. Mr. Sidwell joined board in 2008 and chairs the bank’s risk committee. He was executive vice president and chief financial officer of Morgan Stanley from 2004 and 2007.

The investigation committee will include Ann F. Godbehere, most recently was chief financial officer of Northern Rock after the British bank’s nationalization in the midst of the credit crisis, and Joseph Yam, the executive vice president of the China Society for Finance and Banking and an adviser to the People’s Bank of China.

The rogue trading scandal is a blow to Mr. Grübel, who had pledged to improve the bank’s risk management when he took over in 2009. It was part of his plan to revamp the Swiss bank’s investment banking operation, which had plunged the entire bank into a giant loss in 2007 on the back of bad subprime mortgage investments.

This is just major GG for the bank; anyone think this rogue trade is the biggest troll ever?