Bloomberg News

UBS Loss Shows Banks Fail to Learn From Kerviel, Leeson

September 15, 2011

(Adds U.K. FSA policy information in eighth paragraph)

Sept. 15 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, failed to learn the lessons of billion-dollar losses at Societe Generale SA and Barings Plc, lawyers said.

The bank’s $2 billion loss from what it said was unauthorized trading is reminiscent of former Societe Generale derivatives trader Jerome Kerviel, who caused a 4.9 billion-euro ($6.7 billion) loss in 2008, and Nick Leeson, who caused the collapse of Barings Plc with $1.4 billion in losses in 1995.

“It is astounding that a rogue trader can incur such losses in late 2011 after the harsh lessons all banks should have learned from Societe Generale’s Kerviel fraud,” Simon Morris, a financial services lawyer at CMS Cameron McKenna LLP, said in an e-mailed statement. “This makes grim reading at a time when investment banks are distancing themselves from the casino banking excesses of recent years.”

UBS, based in Zurich, tumbled as much as 9.6 percent in Swiss trading following the announcement, which deals a blow to Chief Executive Officer Oswald Gruebel’s attempts to revive the investment bank after the division recorded 57.1 billion Swiss francs ($65 billion) in cumulative pretax losses in three years through 2009. The loss may revive calls for Gruebel to shrink or shut the unit.

A UBS spokeswoman in London declined to comment.

It is the largest trading loss by a single employee since Kerviel’s unauthorized trades in 2008. A Paris court ordered him last year to repay the full amount of the loss and sentenced him to three years in jail. He’s appealing the ruling.

‘A Nightmare’

Kerviel amassed 50 billion euros in unauthorized positions, concealed with faked hedges. Paris-based Societe Generale discovered the trades in January 2008 and decided to unwind the bets over three days, resulting in the loss.

The U.K. Financial Services Authority said it had discussed the Kerviel case with as many 50 banks in London and that “many had already put in place reviews to ensure they identify any gaps in trading controls and close them as soon as possible,” according to a policy document from March 2008.

The FSA warned banks to “monitor traders’ positions” for “all material risks” and said that most firms were satisfied “that their basic controls and governance surrounding trading, risk management and settlement activities are effective.”

UBS is going to be “killed by the regulators,” Lindsay Thomas, a financial regulation adviser at Sustainable Risks, said in a telephone interview in London today. “It’s a nightmare for the firm, and in this current environment the regulators aren’t going to spare the horses.”

Leeson Trades

Leeson, also a former derivatives trader, caused Britain’s oldest merchant bank, Barings, to collapse after his $1.4 billion in losses on the futures and options markets in Singapore and Osaka, Japan, were uncovered in 1995.

He was freed from a Singapore prison in 1999 after serving two-thirds of his six-and-a-half year sentence for fraud and forgery. Harry’s Bar in Singapore created a drink called the Bank Breaker to commemorate Leeson’s release, mixing Midori, whisky and soda water.

--With assistance from Paul Verschuur, Elena Logutenkova and Carolyn Bandel in Zurich and Gavin Finch in London. Editors: Anthony Aarons, John Pickering

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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