Sigrún Davíðsdóttir's Icelog

The rotten heart of banking

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Yet another example of the rotten heart of banking is being exposed at a court in London where the case of the USB trader Kweku Adoboli is ongoing. Adoboli is accused of “fraudulently gambling” away $2.3bn of UBS own money. Adoboli was a trader working on ‘proprietary trades,’ ie trading for the bank itself.

From witness statements so far it’s clear that as early as 2008 Adoboli started hiding losses, starting with a loss of $400,000. The losses went up and down, as far down as ‘only’ $2m in July last year. Only briefly because by September 14 the figure had climbed up over $2bn. That day, Adoboli gave up and sent an email to his bosses, stating what he had done and what the situation was.

Ron Greenidge, Adoboli’s line manager who lost his job at UBS for alleged gross misconduct in supervising Adoboli, was questioned this week. During the cross examination defence barrister Charles Sherrard convincingly showed that although there were limits posed on the trades, in reality these limits were ignored. “… risk actually didn’t matter as long as you were making money,” Sherrard claimed. “That’s not true,” answered Greenidge. (As reported in the FT, subscription required.)

Whether Sherrard’s interpretation is correct or not the witness statements show quite clearly that for some reason the limits imposed were continuously ignored. Adoboli was time and again far beyond the limits in his trades. Adoboli is now being sued and his colleagues lost their jobs for a behaviour the bank did nothing to stop. There is nothing to indicate that Adoboli’s colleagues and his superiors knew he hid his losses but they sure did know that he was trading way out of line with the bank’s own rules.

This case makes it very clear that yes, there were rules as to how to carry out trades but no, these rules were not followed. The rules looked like something the bank could point at in case FSA inquired about them, in other words pure window dressing. There was more money to be made by not following the rules than by keeping them. Compliance to these rules wasn’t an issue at the bank. Traders like Adoboli weren’t supposed to follow the rules. So long they made money disobeying the rules was accepted, even condoned. On a day where Adoboli held a position of $200m – the limit was $100m – another supervisor, John DiBacco, complimented Adoboli. He made $6m on that position, and DiBacco wrote to him “well done” though later reminding Adoboli that he should tell him before and not after the trade.

In these trades USB’s own money was at stake. If USB were a private company, gambling with its own money, this wouldn’t matter. The unfortunate thing is that the bank, indeed a private company, is a retail bank, ia putting at risk deposits covered by deposit guarantee schemes.

Two measures would possibly help to counteract the rot: splitting apart retail banks and investment banks – and use the penal code more aggressively when there are justifiable grounds to do so.

FSA’s chairman Lord Turner said in the summer of 2009 that the City was too big for the good of society. “”I think some of it is socially useless activity,” Turner said in a debate organised by the Prospect magazine. What an outcry from the banking industry these words caused. Now that we have a much clearer notion of this activity not only being socially non-useful and indeed directly harmful but in some cases against the law – keep in mind the LIBOR rigging, banks such as HSBC ignoring money-laundering rules – there is a good case for splitting permanently apart retail banking and investment banking. Two years ago a banker said to me that bankers wouldn’t understand anything but having retail and investment banking split apart. The momentum in that direction, on both sides of the Atlantic, is woefully anaemic.

The Adoboli case is yet another exposure of the rotten culture in modern banking. Some soft reprimand won’t do away with the thinking demonstrated in the Adoboli case – that rules aren’t to be obeyed as long as more money can be made be disobeying them rather than obeying them. This culture applauds any way to make money in spite of all rules, making it all the more galling to think that a case after case is being closed by the authorities on both sides of the Atlantic where shareholders shoulder losses incurred by managers who think nothing of breaking the bank rules or indeed the law.

The only way to change the culture is to make managers – and every single bank employee – realise that violating rules and laws will be dealt with in the same way as any offense. Anyone using a crowbar to rob a bank can be pretty sure that the police will spare no means to catch the offender. If a group of bankers, lawyers and accountants conspire to ia ignore laws on money laundering they can rely on the HSBC case and rest assured that the people they are working for, the shareholders, will be asked to pay eventual fines.

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Written by Sigrún Davídsdóttir

September 23rd, 2012 at 7:53 pm

Posted in Iceland

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