Support Marketplace

UBS trader makes $2 billion mistake

A trader rubs his face while working on the floor of the New York Stock Exchange October 7, 2008 in New York City.

Nothing makes Wall Street buzz like a rogue trader story. Police in London arrested 31-year-old Kweku Adoboli, a junior trader at UBS. The word is he may have lost the company $2 billion "unauthorized trading."

This raises a number of interesting questions, such as how can a banker can trade without authorization in these days of tight regulation? And would the trading still have been considered "unauthorized" if Mr Adoboli's bets had paid off? We suspect that rather than setting the Old Bill on his tail, UBS would have moved him into the corner office.

UBS, in other words, is really only focused on the losses racked up by Mr Adoboli. Regulators are concerned with a wider issue, namely the tendency of some banks to take big risks in so-called proprietary trading. Prop trading, as it's called, is when banks trade with their own money, as opposed to their clients' money.

The people who want to regulate prop trading argue that it's dangerous, because if a bank makes a bad bet with its own money, then the entire bank is on the hook. That risks the cash deposits of all its customers. If you bet wrong with a client's money, the only the client loses.

Here in the U.S., the biggest proponent of separating prop trading from client trading has been Paul Volcker, the former Fed chair and former Obama economic adviser. He managed to get what we've come to call the "Volcker Rule" into the Dodd-Frank financial regulation law.

There's some uncertainty as to whether the rule will be implemented, and banks are doing what they can to stop it. But proponents of the law are using Mr. Adoboli as an example of what can go wrong on a prop trading desk. After all, the Swiss government had to bail out UBS two years ago because of bad bets by its traders on U.S. mortgage loans. The bank will survive this loss, but its hoped-for quarterly profit is now a mirage.

We spoke with Economics Professor Gerald Epstein from the University of Massachusetts at Amherst. He agreed that today's UBS news hurts the banks' argument that, ever since the financial crisis of 2008, they've been prudent with their money and their trades. But he also pointed out that the big banks are in a difficult position: under pressure to show big profits, but in an economic environment where there's not a lot of money to be made in the traditional business of making loans.

Oh, and did we forget to point out that the UBS announcement came on the third anniversary of the collapse of Lehman Brothers?


Also on the show today, Freddie Mac said today the 30-year fixed-rate mortgage hit its lowest level since 1951. Great for would-be home buyers, but are there any of them left? That news kept The Marketplace Pulse flat today.

About the author

David Brancaccio is the host of Marketplace Morning Report. Follow David on Twitter @DavidBrancaccio

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...