LONDON A $2 billion rogue trading hit at UBS deals a savage blow to its new chief risk officer, previously head of risk at Lehman Brothers, and undermines claims by the Swiss bank and the industry that such events are a thing of the past.
Maureen Miskovic took over as chief risk officer at UBS at the start of the year. She arrived from U.S.-based financial services group State Street with a strong reputation and has shaken up risk management at the bank, according to one industry source.
So news on Thursday that a single trader had lost UBS around $2 billion in unauthorized deals, and the arrest of 31-year-old Kweku Adoboli in London in connection with the case, stunned the market and sent shares skidding [ID:nL5E7KF0F1]
"It's astonishing given the technology, the systems, the emphasis on risk. UBS has been focusing on it, post-crisis they've put more focus on it than a lot of other banks," the industry source said.
"I'm surprised that this many years after (previous rogue trader) Nick Leeson there are still the Jerome Kerviels of the world and now this one. How does a 31-year-old rack up a $2 billion loss without anybody noticing?"
Others said the crisis showed lax supervision at UBS and threw the spotlight on an industry that will always compel some staff to take excessive risks to keep ahead of rivals.
"No rogue trader works in a vacuum, and UBS's management must have taken its eye off the ball to allow a trader to operate on this scale without sufficient supervision and without the systems to monitor his trades," said Simon Morris, a partner at UK law firm CMS Cameron McKenna.
"They, and the shareholders, must now pay the bill for this laxness."
OUTWITTING THE SYSTEM
Miskovic, who is based in Zurich and directly reports to Chief Executive Oswald Gruebel, had been head of risk at State Street from 2008 to 2010. From 1996-2002, she was chief risk officer at Lehman Brothers, the U.S. investment bank that collapsed three years ago today. Before that she worked at Morgan Stanley.
UK citizen Miskovic replaced Philip Lofts, a UBS veteran who was promoted to head UBS Americas.
She brought in Mark Sandborn as head of risk of the investment bank, who started in April.
UBS, which is struggling to regain investor confidence and rebuild its credibility after taking $50 billion of losses in the financial crisis, warned it might post a loss in the third quarter after the latest blow.
The scandal will raise questions about the industry's risk credentials, which were supposed to have improved after French dealer Jerome cost Societe Generale 4.9 billion euros in France's biggest trading scandal three years ago.
"Volatility positions can blow out pretty quickly in the current environment but you'd expect them (banks) to have had controls in place," said one head of execution at a large investment bank.
Banks have spent tens of millions of euros on improving IT systems and risk management jobs have not been hit by the wave of staff cuts.
The caliber of risk management staff has improved in recent years and traders and other front office staff have moved into risk roles, one recruitment industry executive said.
"Part of the problem is that the banks' risk and compliance units are organized in silos, whereas the trading desks often straddle more than one surveillance team -- so things inevitably get missed," said Wolfgang Fabisch, CEO of German compliance consulting firm b-next.
Ben Kingsley, a partner at London law firm Slaughter and May, added: "No matter how much beef you add to the compliance departments, and how big a stick the regulator wields, you have to expect there will be at least one guy who thinks he can outwit the system."
One of the most notorious rogue traders was Nick Leeson, a futures trader in Singapore, whose $1.4 billion derivatives losses triggered the collapse of Britain's venerable Barings Bank in 1995.
Fourteen of the most notorious rogue traders in the last two decades have cost banks more than $20 billion.
(Additional reporting by Luke Jeffs; Editing by Elaine Hardcastle)