Bloomberg News

UBS Rogue Hurts Banks’ War on Rules: William D. Cohan

September 16, 2011

(Deletes reference to Facebook in second paragraph.)

Sept. 16 (Bloomberg) -- If Wall Street’s not-so-subtle efforts to regain the upper hand against regulators soon begin to lose steam, it will be easy to pinpoint the reason: Kweku Adoboli, the 31-year-old purported rogue trader at UBS AG in London who allegedly cost the firm $2 billion on a horribly wrong bet.

London police arrested Adoboli at his desk at about 3:30 a.m. Thursday. While no doubt UBS will try to pin the huge loss on Adoboli alone -- just as Societe Generale SA did to Jerome Kerviel in 2008 and Kidder Peabody & Co. Inc. did to Joseph Jett in 1993 -- there is likely to be more to the story.

Recall that Jett contended Kidder had audited his trades during the summer of 1993 and knew everything he did. “When a trader is audited,” he told “60 Minutes,” “that is the firm’s stamp of approval on everything the trader does. I cannot fathom, how, in all these reports that have come out since my dismissal, [there is] this claim of not knowing what is going on.”

Why is it that a trader who exceeds his trading limits and makes a fortune is a hero, but a trader who exceeds his trading limits and loses a fortune is a rogue?

Failure of Compliance

Whether UBS is shown to have been aware of Adoboli’s trading is almost beside the point. If the bank was aware of it and did not stop it, then its failure to do so is unconscionable. If it was not aware of the trades, then its compliance and risk management departments’ failure to prevent them from happening in the first place is equally appalling.

In the post-Lehman, Dodd-Frank, Basel-III era, it is nearly unfathomable that a global bank of UBS’s heft, wealth and importance could allow this kind of loss to occur. Where were the adults?

There will almost certainly be regulatory consequences for the rest of Wall Street as a result of this ill-timed debacle. The banks will howl, but tighter rules could actually help protect the rest of us from their bad behavior.

In the past few months, it seemed, Wall Street was beginning to regain the upper hand on its regulators. A coalition of 44 Republican senators vowed to block any nominee - - not just Elizabeth Warren -- proposed head of the new Consumer Financial Protection Bureau unless the agency is essentially gutted. (Warren’s replacement, Richard Cordray, is still awaiting Senate approval.) There had been much talk in Congress about watering down certain provisions of the Dodd-Frank law to make them more palatable to Wall Street. The banks also seem to have had some success influencing the still-to-be-written derivatives regulations from the Commodity Futures Trading Commission. The drafting of many of the CFTC’s regulations has been delayed -- whether because of Wall Street’s influence or a preference for thoroughness is not exactly clear. Until these new rules are written, disseminated and approved, Gary Gensler, the chairman of the CFTC, told me yesterday, the regulatory regime on Wall Street hasn’t really changed all that much from the days before the crisis.

Dimon’s Shortsighted Claim

Now, one suspects, the global regulatory agencies will have no choice but to come down hard on big banks and demand the tougher rules that Wall Street abhors. Suddenly, the critical comments made earlier in the week by Jamie Dimon, chief executive officer of JPMorgan Chase & Co., about the Basel III capital rules seem woefully shortsighted. “I’m very close to thinking the United States shouldn’t be in Basel any more,” Dimon told the Financial Times. “I would not have agreed to rules that are blatantly anti-American. Our regulators should go there and say: ‘If it’s not in the interests of the United States, were not doing it.’ "

A mere three days later -- on the third anniversary of the collapse of Lehman Brothers no less - it became even clearer that some Wall Street firms don’t have the slightest clue about how to manage their businesses to prevent the kind of unexplainable trading losses that an increasingly fragile world economy can no longer abide.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

--Editors: Tobin Harshaw, Stacey Shick

Click on “Send Comment” in sidebar display to send a letter to the editor.

To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.


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