So if we haven’t already heard enough about Kweku Abodoli’s rogue trading marathon, this weekend’s announcement that CEO of UBS (SIX: UBSN , NYSE: UBS) Oswald Grübel has resigned is sure to rattle heads all over the world. Certainly, the $2.3B USD rogue trading scandal was enough to get bank management to ask questions but few analysts foresaw such a sudden resignation coming. We might then ask why it could have happened…
Yet all this talk of rogue trading would seem to take us back to January 2008 when Société Générale (Euronext: GLE) trader Jérôme Kerviel closed out fraudulent positions that caused a nearly €4.9B ($3B USD) loss for the bank. However Société Générale handled the situation quite differently: CEO Daniel Bouton worked on closing out the sour positions, guaranteed an influx of new equity from various US based banks, and ultimately manned the helm through the ensuing financial crisis (which many think was sparked by the incident) despite calls to step down, most notably from French President Nicolas Sarkozy.
What we then see is an odd reversal of banking culture with the Swiss bank bringing out the guillotine and cutting off its top executive while the French bank stands by its CEO. But really, this is not so much about culture as it is about what actually happened–– a story we will likely never know in its entirety. What we don’t know is the level of involvement (and knowledge) that the bank’s upper management had of Mr. Adoboli’s trading positions. The Swiss banks are notorious for maintaining very strict protocols (which would have likely been revised after the Société Générale incident) that would supposedly prevent an incident of this magnitude from happening. It remains a distinct possibility that management did in fact know about the positions beforehand and only called in FINMA (the Swiss Financial Market Supervisory Authority) when they realized the positions were getting out of hand.
UBS faces a fundamentally different problem from other banks that have had to deal with rogue trading scandals in that the very fact that something like this could happen in a proprietary trading situation (i.e. trading with the bank’s own money) undermines the ‘Swiss Integrity’ often associated with large Swiss banks like UBS. Ultimately, we might very well see both private and institutional investors steering clear of the bank–– a trend that would affect all of its divisions and operations while having major implications for the global banking system.
Remember that Volcker rule we keep hearing about, the one that bans proprietary trading? UBS just gave proponents of the measure the silver bullet they always hoped for. We just have to wait and see what US repercussions the incident will have.
Posted By Alfredo Luque