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Friday, September 16, 2011

UBS Loses $2 Billion

This story is interesting. A "rogue trader" at UBS lost $2Billion. Kweku Adoboli is the theif/scapegoat.

It's hilarious they way the mainstream media says "One rogue trader is to blame. There are no structural defects in the financial system. Move along! There's nothing to see here." Who do they think they're fooling?

He didn't lose $2B all by himself. His boss, his boss' boss, and UBS' risk managers are also to blame.

It's much easier to say

It's one isolated bad apple.
rather than
The financial industry is one big cesspool of corruption.

The financial industry is a very psychopath-friendly environment. This post on zero hedge had some good bits.
According to an entry on Facebook, Kweku Adoboli, a 32-year-old computer science graduate described as an "up and coming" trader by colleagues


"There is a lot of shock, horror and disbelief," the person said of his arrest. "He was incredibly straight and upstanding with very high integrity. He would definitely not be the first place you start looking."
Notice the psychopath indicators. "Up and coming" means "His fellow psychopaths were in awe of his l33t evil skills."

A psychopath convinces everyone else that he has super-high integrity. Here's a tip. If there's an employee for which everyone says "He has very high integrity. He would never steal from his employer. We're lucky to have him working here.", that's a dead giveaway that he's probably a crook.

For example, one of my current coworkers is somewhat psychopathic. He has everyone thinking he's a super genius, when he's only somewhat competent. People say they're lucky to have him. It's obvious to me that his reputation far exceeds his actual ability, due to his social manipulation skills.

It's obvious what happened. Adoboli used his psychopath skills to cover his tracks and deflect suspicion. It also is possible that someone else is the true thief, and he's the scapegoat.

I couldn't find a good source regarding what he was trading. The explanations were:
  1. ETFs
  2. naked silver short
  3. derivatives
I don't see how anyone could hide $2B in losses with ETFs. Everything is exchange traded and marked-to-market. He may have been supposed to hedging his ETF trades but he didn't. That is possible, but that wouldn't lead to $2B in losses.

"Naked silver short" doesn't make sense either. Silver didn't spike recently.

"Derivatives" is the most likely explanation for the loss.

Via derivatives, it's possible to construct a trading system that makes $1M/month 99% of the time, but loses $2B the remaining 1% of the time. That's a good system, because you make a big bonus 99% of the time and get a new job 1% of the time.

"Other people's money" exacerbates the problem. Adoboli wasn't risking his own personal money. He was risking UBS' shareholders' money. Once he was $10M+ in the hole, he turned to fraud. If he came clean immediately, "I lost $10M!", then he would have been fired immediately. Instead, he took bigger and bigger risks. He was hoping to get lucky and return to profitability. It makes no difference if you get fired with $10M in losses or $2B in losses.

The risk managers at UBS should have seen what was happening. They are partially responsible. No matter how cleverly he tried to hide his losses, the risk managers should still be checking.

It's possible that Adoboli is the fall guy for someone else. It's possible that he's a psychopath, manipulating others to trust him and not verify his trades. In either case, he is not solely responsible for the loss. UBS' risk managers are partially responsible. Adoboli's bosses are partially responsible.

When there's a crime like this, the mainstream media blames one bad apple. That covers up the systemic problem. The financial industry is very psychopath-friendly. A skilled psychopath can steal lots of money in the financial industry, usually legally without getting caught. Adoboli probably crossed the line into direct flagrant fraud. UBS is still too big to fail. Unfortunately for him, Adoboli is not too big to fail and too big to get blamed.

There's another possibility. Instead of wasting $2B to random strangers, the losses may have been dumped to a confederate. Derivative trades are nearly zero sum. If UBS lost $2B, then someone else has $2B in windfall profits.

Anybody who suggests that Adoboli is solely responsible for the $2B loss is clueless or lying.

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