UBS trading losses fuel push for split banking

AP News
Posted: Sep 17, 2011 4:32 PM
UBS trading losses fuel push for split banking

Would you trust UBS with your money now?

As regulators join the Swiss bank in scrambling to figure out how a single suspect could have racked up as much as $2 billion worth of rotten bets over three years, analysts and politicians say the catastrophic losses reinforce the case for divorcing retail banks from their investment arms.

In Britain, plans to separate _ or "ring fence" _ the everyday banking familiar to most people such as deposits, mortgages, and loans from the complex and potentially dangerous investment trading have been on the cards for months.

The plans were approved by a government-appointed commission a few days ago, and backers of the ring-fencing idea say that, in a way, the arrest of 31-year-old trader Kweku Adoboli on charges of fraud and false accounting could not have come at a better time.

British Treasury chief George Osborne told Britain's Sky News television that the "shocking case" uncovered at the Swiss bank was as strong an argument as any for following the recommendations made by the commission, chaired by John Vickers, a former chief economist of the Bank of England.

"If you ever wanted a better example of why the kinds of ideas that John Vickers was putting forward were right for Britain, look at what happened at UBS just a few days later," Osborne told the broadcaster.

Vickers' 363-page report argued that Britain's retail banks should be split off by 2019 to reduce the risks of taxpayers having to bear the cost of any future bailouts, saying that "the risks inevitably associated with banking have to sit somewhere, and it should not be with taxpayers."

The commission recommended that retail banks should be "legally, economically and operationally separate" from the parent companies, and should have "distinct governance arrangements, and should have different cultures."

The report got a mixed reception earlier this week before Adoboli's arrest. Some welcomed the report as a way of insulating the bailout-weary public from high-risk financial maneuvers derided as "casino banking." But the British Bankers' Association, the industry's main lobby group, sounded a cautious note, saying the planned reforms "need to be carefully analyzed and compared with those agreed internationally."

Ian Gordon, an analyst at Evolution Securities, spoke for others in the finance community when he dismissed the recommendations as "unwelcome and unhelpful."

But opposition to Vickers' plan is likely to be tougher now, analysts say, particularly if it is confirmed that Adoboli gambled away $2 billion without UBS even realizing the money was gone.

"This will confirm any existing prejudices about 'casino' banking and provide increased support for retail ring fencing or even tougher solutions," Citigroup analyst Ronit Ghose was quoted as saying by the Financial Times.

Banking experts questioned why UBS didn't have tighter rules in place to spot rogue trading.

"The story here is not just the $2 billion in trading losses, but the longer-term ramifications," said Mark Williams, a former bank examiner at the Federal Reserve and risk management expert at Boston University. "Why does an international bank appear to have such weak operational controls over its traders?"

Jack Ablin, chief investment officer at Harris Private Bank, said he was surprised, given the high-profile cases of rogue traders in recent years.

"The sense I had was that investment banks across the board were locking down on their trading activity," Ablin said. "I thought the days of rogue trading were over."

As politicians and the public weighed the implications of Adoboli's arrest, friends of the alleged rogue trader voiced disbelief.

Chrissie Wunna described her former schoolmate to The Associated Press as "one of the kindest, sweetest, gentlemen you'd ever want to meet." The 30-year-old model said in an email that Adoboli "really was a 'goody-goody' and highly regarded by us all."

She said she and her friends were "more than shocked" at the news that he had been detained.

One person who wasn't surprised at the news was Nick Leeson, the trader who brought down British bank Barings in 1995 after making around $1.4 billion in losses on unauthorized trades. In a series of tweets, Leeson suggested that banks' recklessness made these kinds of disasters inevitable.

"Financial innovation is all the banks care about," he said. "Controls are for lesser mortals."

Adoboli has yet to enter a plea. His next appearance in court is Thursday.


Candice Choi in New York, and Rod McGuirk in Canberra, Australia, contributed to this report.