February 28, 2024

UBS Says Rogue Trading Losses Are Closer to $2.3 Billion

In a statement on Sunday, UBS said it had failed to notice the trading of index futures on the Standard Poor’s 500-stock index, the DAX in Frankfurt and the Euro Stoxx 50 because they had been offset by fictitious positions that kept the transactions within the bank’s risk-exposure limits.

A London court on Friday charged Kweku M. Adoboli, 31, with one count of fraud and two counts of false accounting dating to as early as October 2008.

“The true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash E.T.F. positions, allegedly executed by the trader,” the UBS statement said. “These fictitious trades concealed the fact that the index futures trades violated UBS’s risk limits.”

In the statement, the bank’s first since it announced the trading loss on Thursday, UBS said that the total loss was higher than the $2 billion it first estimated. It reiterated that no client positions had been affected and said it had appointed an independent committee to investigate the trades and the bank’s risk systems.

“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” UBS said.

The bank has covered the positions, and the equities business was again operating within its previously defined risk limits.

However, questions remain about how it was possible for the trader to hide the fake hedges in exchange-traded funds from the bank’s internal controls. A spokeswoman for UBS declined to comment Sunday on Mr. Adoboli’s other charges related to the period before the three months during which the trading loss was accumulated.

UBS confirmed that Mr. Adoboli’s trades started to come apart on Wednesday when compliance officers reviewing his positions led the trader to reveal his unauthorized activity. UBS then called the police at 1 a.m. on Thursday and Mr. Adoboli was arrested at 3:30 a.m.

He remains in police custody until the next hearing, set for Thursday.

The chief executive of UBS, Oswald J. Grübel, tried to raise morale among the bank’s staff on Sunday by telling employees in an internal memo that he knew many were “shocked and disappointed” but that they should be proud of their strong customer relationships.

He also wrote that “the incident was perpetrated by one rogue trader” and that management would “do all it takes to determine how this happened and what we need to do to ensure that it does not recur.”

“Ultimately, the buck stops with me,” Mr. Grübel added, but he also urged employees to report any “wrongful behavior and conduct in the workplace.”

Mr. Grübel and Carsten Kengeter, the head of the investment banking business, faced mounting pressure to resign over the weekend after some Swiss lawmakers said it was unacceptable that a bank that had once benefited from a government bailout would allow such lapses in risk management.

In an interview with Der Sonntag, a Swiss newspaper, Mr. Grübel said that he had not considered resigning. “If someone acts in a criminal way, there’s nothing you can do,” Mr. Grübel told the paper.

He added that as chief executive he had “the responsibility for everything that happens in the bank” but that “if you ask me whether I feel guilty, I would say no.”

The bank said Sunday that it was starting its own investigation, adding to inquiries by the British and Swiss financial regulators and the London police. David Sidwell, who serves on the UBS board, will lead the independent investigation, the bank said.

Mr. Sidwell joined the board in 2008 and is chairman of the bank’s risk committee. He was executive vice president and chief financial officer of Morgan Stanley from 2004 to 2007.

The investigation committee will include Ann F. Godbehere, most recently the chief financial officer of Northern Rock after the British bank’s nationalization in the midst of the credit crisis, and Joseph Yam, the executive vice president of the China Society for Finance and Banking and an adviser to the People’s Bank of China.

The rogue trading scandal is a blow to Mr. Grübel, who had pledged to improve the bank’s risk management when he took over in 2009. It was part of his plan to revamp the investment banking operation, which had plunged the entire bank into a giant loss in 2007 on the back of bad subprime mortgage investments.

Article source: http://www.nytimes.com/2011/09/19/business/global/ubs-says-trading-losses-closer-to-2-3-billion.html?partner=rss&emc=rss

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