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Monday, September 26, 2011

Lies And UBS' $2B Loss

Kweku Adoboli was blamed/scapegoated for $2B in losses by UBS. More details have emerged, including an "official explanation" for the losses. Here are some links that question the "official explanation" of events.

The "official story" is that Kweku Adoboli entered fake trades into UBS' computers, to hide his losses.

There's one flaw in the "official explanation". It makes absolutely no sense.

If you have any knowledge of bank clearing and settlement, the "official explanation" makes no sense.

Kweku Adoboli had real losses on his trades. He had fake gains that offset the losses. Adoboli was trading liquid ETFs and currencies and index futures. They actively trade and have prices quoted daily.

UBS should have had mark-to-market gains and margin calls, on the fake trades. It is *IMPOSSIBLE* that UBS ignored the missing payment. Banks don't forget to collect collateral and margin on large trades.

Adoboli was only authorized to hedge. If a customer bought S&P futures, then Adoboli would go and buy the matching index future or basket of stocks. Adoboli's position should have been hedged at all times. By entering fake trades, Adoboli created the impression that he was hedged, even though he was gambling on market moves.

Initially, Adoboli had small losses. He made bigger and bigger bets, to try to get back to even. He kept making the wrong moves, buying high and selling low. When you're gambling with others people's money, and there's no accountability, you can lose a lot!

If UBS lost $2B, then some other traders have $2B in windfall profits! It is possible that a trader could intentionally dump losses to a confederate. According to the "official explanation", that didn't happen in this case.

To lose $2B, Adoboli needed positions of $10B-$20B+. There's no way that a trader can make a $1M+ trade, without his boss noticing and approving. Adoboli's boss and boss' boss had to notice and approve his trades.

However, my now-ex-empolyer's computers had an interesting defect. If a DBA edited the database, nobody would ever know. (I suspected that some dishonest DBAs were actually doing this.) However, to pull that off, Adoboli would have needed the DBA password *AND* several other people complicit in helping cover his tracks. Adoboli was promoted from the back office to trading. Even if Adoboli still had his back office password, he would have needed help from others to commit fraud.

If I were advising Adoboli's lawyer, there's a clear path to acquittal or a favorable plea-bargain. Adoboli's lawyer should emphasize all the ways that UBS' risk managers failed miserably. UBS should allow a lenient plea-bargain. They don't want a public display of their gross negligence. Adoboli's lawyer should threaten to totally embarrass UBS' risk managers, if they insist on a trial.

That's the fallacy in the "official explanation". Allegedly, Adoboli made fake trades to hide his losses. UBS should have made mark-to-market and margin calls on the fake positions. How could they have missed that? The official lie makes absolutely no sense.

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