Bank bosses should pay for trader errors: fund managers

Reuters News
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Posted: Sep 22, 2011 9:11 AM
Bank bosses should pay for trader errors: fund managers

By Sinead Cruise

LONDON (Reuters) - Bank bosses must lose their jobs if a trader in their pay is found guilty of hiding risky bets that compromise their employer's ability to post dividends or repay bonds, a Reuters snap survey has found.

"(It) gives them skin in the game and the resolve to put in place stronger processes," one fund manager said, arguing those with ultimate responsibility for the bank's trading activities should quit or be fired when things go wrong.

All 12 respondents at investment houses running an aggregated $1.7 trillion in assets said they wanted chief executives to take responsibility if investigations uncovered negligence or grave flaws in risk controls.

The findings will make unpleasant reading for UBS AG head Oswald Gruebel as he kickstarts a process of reconciliation with shareholders still reeling from news of an alleged $2.3 billion fraud at Switzerland's largest bank.

Senior figures at the Government of Singapore Investment Corporation, the biggest investor in UBS, have already berated the bank for "lapses" that allowed 31-year old Kweku Adoboli to allegedly conceal scores of unauthorised, loss-making trades over several months.

Just four of the 12 fund managers polled said the debacle showed regulators were falling behind in a quest to get rid of "casino" banking, with the majority of respondents blaming inconsistent supervision within banks.

"Fraud by individuals has always been a risk. Regulation will never stop this. Good management will minimize the risk," a second manager said.

However, MAM Funds Fund Manager Martin Turner said the incident showed neither the regulators nor banks fully grasped the risks they run.

TURMOIL

The survey reflects growing frustration among asset managers upset by the scale of market turmoil caused by reckless bankers in recent years, with the shock of Societe Generale's 5 billion euro ($6.8 billion) hit at the hands of trader Jerome Kerviel still fresh in their minds.

Frederic Oudea, CEO of France's No.2 bank, whose shares have slumped by almost 50 percent since June on the back of worries about its future funding, is still struggling to win back investor trust.

Three respondents said they would reassess the size of their bank equity and bond holdings in the wake of the UBS losses, foreshadowing trouble for banks planning to tap money markets to meet Basel III demands for increased capital.

Speaking to Reuters at an event in Taipei, Leigh Harrison, global equities head at UBS shareholder Threadneedle Investments, said Gruebel did not need to step down but he had lost interest in buying more UBS shares.

A fifth poll respondent requesting anonymity said: "We are likely to re-evaluate portfolios ... (The UBS case) will mean that we place more emphasis on perceived risk controls -- something which is very difficult to assess with any kind of accuracy," the manager conceded.

Sanjay Joshi, senior portfolio manager at investment manager London & Capital, said he would probably downsize his exposure.

But seven managers said they had started to pare back exposure to the sector long before last week's events amid fears of a rise in the number of cavalier traders seeking new ways to profit outside the strict rules on proprietary trading.

Chris Bowie, head of credit at Ignis Asset Management, said he was already significantly underweight in banks, especially investment banks, while a seventh manager said banks stopped being attractive when they started "the transition from growth to utility which they were 25 years ago."

A third of those surveyed said their confidence in the ability of traders to manage the significant risks they carried was always changing, with even the most experienced trader capable of making costly mistakes.

But a quarter said they doubted many had the skills or training to cope in such a volatile market environment.

"Most of them are rubbish. It's not a training issue, just most do not realize they are playing with other's money," the first manager added.

($1 = 0.730 Euros)

(Additional reporting by Chris Vellacott; Editing by David Holmes and Jon Loades-Carter)