Risk Management

06:38 AM
Melanie Rodier
Melanie Rodier
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UBS Scandal Polarizes Opinions On What Went Wrong

UBS is still giving out only a trickle of information about what actually might have happened.

UBS's $ 2.3 billion loss from a rogue trading scandal is polarizing opinions about what went majorly wrong at the revered Swiss bank.

For some, primarily UBS's CEO, it's no one's fault but 31-year-old trader Kweku Adoboli, who went astray. The firm's chief executive, Oswald Gruebel, has refused to step down, saying calls for his resignation are "purely political." In an interview with Swiss newspaper Der Sonntag, he said he assumed responsibility for all that happens at the bank. But asked whether he felt guilty about the multi-billion dollar scandal, he unequivocally said, "No."

Others believe the scandal should be squarely blamed on an IT problem. Firms today have no excuse for not having a solid risk monitoring system in place, at least for equities if not for more obscure asset classes. If UBS is using a risk system it bought from a vendor, says Adam Honore', research director at Aite Group, the vendor should be "identified and publicly called out." On the other hand, if the Swiss bank decided to build rather than buy a risk solution, the person who made that call should be held responsible for what has turned out to be an inexcusable lack of judgement, he points out.

But Matt Samelson, principal at Woodbine Associates, firmly disagrees with both the above opinions. He believes UBS must take responsibility for the problem, which lies with the bank's enterprise risk management and procedures. "It is not a question of a system going array or something getting past the system," he says, arguing that the trading loss was due to a major flaw in the bank's enterprise risk management - something much more serious than an IT problem.

UBS is still giving out only a trickle of information about what actually might have happened. "But it appears to have something to do with booking of false positions, the booking or canceling of positions or the establishment of false accounts," Samelson says. "If there is an effective oversight framework in place where managers are supervising trades and strategies, it would have been caught long ago." At the root of the scandal is an ongoing and inherent conflict of interest between senior managers and risk managers that is pervasive across the financial industry, Samelson argues.

Loose controls are more common than believed due to deep-seated conflicts between senior, line, and risk managers, as well as performance metrics used to measure firm and individual performance that do not take risk into account, and behavioral biases that result in senior and line management overestimating their abilities to manage risk in light of business generation, according to Samelson.

"The way investment analysts evaluate a firm's performance is that they generally look at it in terms of revenue production. That's very problematic. It should be looked at on a risk-adjusted basis," Samelson explains.

Samelson says managers more often than not will overrule risk managers in favor of trades that generate revenue, not risk. "Independent risk management is a cost center with no counterbalancing revenue and it is viewed as drag on performance. So there's a bias on budgeting time especially when times are tight, to make cost centers do more with less. That's why when you read about layoffs it's often a support function that is cut," he adds.

Since this kind of attitude is widespread in the financial industry, there is a high risk of a similar scandal happening at other firms.

And no one can blame tight budgets for the lack of controls, Samelson says. "People are focusing on compliance because of potential changes in regulations coming down the road. But people are not all of a sudden investing heavily in compliance support and control technology," he says.

"No nirvana happened. People aren't saying let's increase spending on a system and controls function," Samelson adds.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio
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