The Swiss bank UBS announced last night that a rogue trader lost more money than it originally announced. UBS said the total loss is $2.3 billion. In a statement, the bank also gave some detail about the alleged actions of Kwaku Adoboli, who was arrested and charged in London on Friday.
The bank said the losses were incurred during a three-month span of trading in which Adoboli allegedly falsified numbers to hide his risks:
The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio. However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits.
Following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorized activity on September 14, 2011.
Here's how one analyst reacted, according to Reuters: "The UBS explanation about how the loss was incurred is similar to those speculated in the market on Friday but in the cold light of day remains just as shocking," said Peter Thorne, analyst at Helvea.
The bank also announced it set up a special committee to conduct an internal investigation.
As we noted when we first reported the story, the big deal here is that this is a controls failure. Banks have controls in place to alert them when unauthorized trading is going on. Something went wrong here. Also, it's worth noting that while the UBS says the unauthorized trading happened during a three-month span, Adoboli's false accounting charges date back to October of 2008.
Bloomberg is following the responsibility thread in this piece. The company's CEO, Oswald Gruebel, who had been brought out of retirement to straighten out the bank, said he's staying. But in a Swiss TV interview he said the episode is his responsibility and will have to "take the consequences."
Bloomberg also talks to one analyst who very succinctly gets to the bottom line:
"This is a controls failure," said Francois Chaulet, who helps manage 250 million euros ($345 million) at Montsegur Finance in Paris. "How are you going to explain to your shareholders and employees that you've lost this amount from the acts of a single young employee in a trading room."
Gruebel told staff in a memo yesterday that he was "shocked and disappointed" by the unauthorized trading, describing the events as a setback to UBS's reputation and its effort to build up capital. He said the loss won't affect UBS's capital base, and the risk of someone violating the bank's controls "always exists."
"I and the rest of the firm's management are fully focused on thoroughly investigating this issue, and will do all it takes to determine how this happened and what we need to do to ensure that it does not recur," Gruebel said in the memo. "Ultimately, the buck stops with me."