Sigrún Davíðsdóttir's Icelog

The Adoboli case brings a lesson for shareholders – but for how long are shareholders going to let banks squander their capital in an Alice-in-Wonderland topsy turvy banking

It’s difficult to find any sympathy for Kweko Adoboli, the 32 year older UBS trader who this week was sentenced to seven years in prison for causing the bank a loss of $2.3bn – the largest rogue trading loss in the UK. It’s rather sickening to hear of a 30 year old, earning £360.000 in 2010, up from £93.000 in 2007, spending £123.000 on betting and being so short of money in between that he had to turn to payday lenders. But he’s hardly the only young banker to seek some kick in spread betting and to squander his money away – though his reckless way of hiding losses and lying about it puts him in the exclusive category of rogue traders, such as the recently sentenced Jerome Kerviel causing SocGen a loff of $7.2bn – on an international level by far the highest rogue loss so far.

However shocking Adoboli’s behaviour is his case raises some mind-boggling questions about UBS’s own workings. In August 2011, Adoboli’s losses had peaked at $11.8bn – yes, can you imagine: that’s almost the entire Icelandic GDP. At that point the oblivious accounting systems and supervisors at the bank deemed the bank’s risk exposure was $2.3… not billion but million. By mid September 2011, the loss had come down to “only” $2.3bn, Adoboli finally lost his cool, sent this now so famous email telling his superiors he was sorry for the losses and resigned.

True, USB is a big bank and even a small country’s GDP is insignificant compared to its balance sheet. End of September last year its total assets amounted to $1.8t. But it still is rather incomprehensible that Adoboli could have such sums as $11.8bn sloshing around out of view from the bank’s supervision. According to the Daily Telegraph, UBS will now have to pay a record fine, imposed on it by the FSA – the FT guesses the fine might run up to £50m – the largest such fine ever in the UK – for the management oversight that led to the loss of the $2.3bn. The FSA and the Swiss regulator, Finma, have been investigating UBS, because of the Adoboli case, since spring this year.

If this case ends with a fine for the bank it’s yet another example of management oversight, which the managers can just load onto the bank. Yes, some managers have indeed resigned, but they walk quietly into the night, no questions asked and they seem to keep what they have earned from their unsatisfactory work.

What I also find absolutely astounding is another piece of evidence that came out during the trial: in 2007, Adoboli, then aged 27, and his co-worker, later his superior, John Hughes, 24 at the time, were left to manage a $50bn portfolio – that’s now just about three times the Icelandic GDP. On this Adoboli said (subscription): “Our book was massive – a tiny mistake could lead to huge losses. We were two kids trying to figure how this could work. We were losing so much money it was mental.” – Isn’t it a bit mental of UBS to put two kids in charge of a portfolio three times the size of a small country’s GDP?

An internal UBS review in 2008 on the bank’s subprime losses came to the damning conclusion that at a senior level UBS investment bank the focus was on maximising revenue and too little focus on the risk. Now, what did UBS do? Did it reign in the investment bank? No, on the contrary – it expanded fixed income and equity trading. Intoxicated by this spirit, Adoboli ended by blowing up his life and a lot else: UBS is now re-organising the bank, i.a. with people losing their jobs.

If banks such as UBS didn’t learn from the subprime saga, upheavals and losses on 2008 what could teach it a lesson? The Aboboli saga?

Where are shareholders in all of this? Are they for eternity just accepting one wave after the other of losses and fines accrued by the guardians of the shareholder values and assets? Capitalism is based on… capital. In theory, the capital owners are those who take risk and reap reward. In the Alice-in-Wonderland banking of today things are topsy turvy and the old rules of capitalism have been obliterated. Now it’s the capital owners, the shareholders, who reap the losses (or the state, when things go completely awry) but the bankers – no matter the oversight, such as not noticing $11.8bn losses or letting kids fool around with GDP-sized portfolios – are more or less sheltered by cleverly constructed pay packages.

On whose side are regulators? On the side of the capital owners or its guardians? And what about the politicians? Has everyone completely lost sight of the fundamentals of capitalism? The world needs capital put to good use, not capital squandered away by careless bank managers who don’t understand or don’t examine what’s going on in their institutions. And the world needs intellectually curious and plain curious central bankers and regulators.

Shareholders of the world, follow Marx’s advice and unite – against the squanderers of your capital!

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