At any rate, now that just about everyone else in the world has weighed in on this issue (including the Red Cowboy, who even assumed I'd be writing about this), I figure I might as well jump on the pile. Relegating this discussion into Quote of the Week territory seems like a reasonable choice, because it will prevent me from launching into a long-form tirade that would otherwise inevitably arise.
To summarize my own feelings on the matter, it's probably best to just rely on my knee-jerk response the morning that the news first broke. As I wrote to a friend,
I’m not convinced this UBS thing was really an “unauthorized trade” at all... My guess is it was either a) a completely authorized (wink-and-nod) trade that went bad on high leverage, and they left the trader out to dry when it got bad enough, or b) a kinda-sorta authorized trade that started to go bad, then engulfed risk managers etc. as the trade went further and further against them. It is basically impossible to hide losses of that amount without at least 2 or 3 guys being involved in the hiding.
That about sums it up from my point of view. Banks regularly hire these types of "loose cannon" traders, and they knowingly allow their risk management protocol to be violated on a regular basis. When they make big gains, they reward their traders with huge bonuses, and when the trades go bad, they try to make the trader fall on his sword. It's just another version of the "privatized gain, socialized loss" dynamic that seems to be dominating matters here in the U.S. in recent years.Banks are PR masters, and they probably assume that it’s easier to tell someone “oh crap, we had a rogue trader, we’ll overhaul our risk management procedures that none of you can actually see operating anyway, this’ll all be fixed” than to tell them “yeah, there are serious structural flaws in the way we go about trading and assessing risk, and this sort of thing is likely to happen fairly frequently in turbulent times”. So they took a shot. Maybe people will buy it, maybe they won’t, but it’s worth a shot.
Banks always want full credit for their profits, but attempt to abdicate responsibility for any losses or sub-optimal outcomes. Unfortunately, that's not how it works--or, at least, that's not how it's supposed to work. But that doesn't stop them from trying. Hey wait a minute, didn't I say I wasn't going to erupt into a long-form tirade? My bad.
With apologies to Barry Ritholtz (who wrote the single best piece I've read on the topic--if you read nothing else, read this) and Matt Stoller, this week's Quote of the Week goes to Matt Taibbi, who's made a name for himself as the go-to guy when banks blow themselves up.
This week's QUOTE OF THE WEEK
"In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book."
- Matt Taibbi, Rolling Stone
Well said as always, Matt. For what it's worth, UBS didn't escape culpability by trying to isolate this problem to a single trader. Their CEO was ousted and the bank's stock has been under extreme pressure. Will that stop other banks from trying the same trick? I sure doubt it.