7 ms·

The $2 Billion UBS Incident: 'Rogue Trader' My Ass

131 points by bootload 15y ago

Hisoka 15y ago
It's not just investment bankers that have an appetite for this. It's a human problem - greed, and short-term thinking. Given the right environment and rules, and most humans would act the same way. The key is to prevent that environment from flourishing. Don't give them so much leverage. If you got $100 million in the bank, don't freaking let them trade $1 billion. Don't let them loan $1 billion. If I ask for $100 million back today, you better give it back TODAY.. not tomorrow.. not next week.. NOW. The analogy in the internet world is SEO, and gaming the search engines.
yummyfajitas 15y ago
I'm not sure what the relevance of investment banker's "huge appetite for risk" is. The current crisis was caused by people making AAA-certified safe bets, most of which were done in order to comply with Basel II and other capitalization requirements [1]. And even ignoring capitalization-driven demand, a long position on housing was considered a safe bet. If anything, we needed more risk taking and more derivatives - bankers willing to bet against the crowd, and derivatives which give them the ability to take a short position. [1] If a commercial bank wants exposure to housing, all they needed to do is make some loans. But various bank safety regulations encouraged them to hedge their risks by selling off the loans and purchasing AAA paper in order to hedge against mortgage risks in their local market.
- palish 15y ago
  The relevance is: "investment banking" may have done more harm than good. (As in, consider their whole existence. What might the world have been like without investment banking?)
  - RockyMcNuts 15y ago
    do you think Google would exist, and they would have been able to raise money for a massive server farm, if initial investors didn't know they would be able to IPO it if it was successful? do you think the market for YC startups would be hot if there was no public stock market for companies to raise the money to buy them?
  - phyalow 15y ago
    No Major Corporations, or capital raising/lending.
    - Roboprog 15y ago
      You say that like it's a bad thing :-) OK, the second is probably a bad thing. "Major corporation" seems to leave a bad taste in my mouth, though. Probably because monopolistic companies are run like Soviet Politburos with idiotic wasteful top-down planning -- "corporate communism".
  - lionhearted 15y ago
    > (As in, consider their whole existence. What might the world have been like without investment banking?) It's a seen-and-unseen problem. Wages rising for the same activity is actually rare and historically really weird. The chief way people improve in the world is to automate/creative destruction old professions in favor of more modern ones, and through lower costs due to efficiency. Investment banking enables and accelerates both of those processes. It's a stretch, but not insane to think that, say, streaming video or iPads might not exist without investment banking. Someone replies, who cares about iPads or streaming video? But how much have, say, TED talks enabled thinkers to make progress on hard important problems? The causal chains here are long and complex, it's hard to say for sure. But creative destruction and replacement of old industries with new means better professions, and reducing costs is the other chief way to prosperity. You know about the huge blowups because they're noteworthy, you don't consider what industries wouldn't exist without a gradual re-allocating and efficiency, freeing up more people to do higher level work and driving costs down. It's hard to do mentally, inevitably someone will reply, "LOL, this guy thinks without investment banking there'd be no iPad!! That's all Jobs and Woz dude!!" I don't know. Maybe. But why is South Korea so much nicer to live in than South Vietnam? Why did South Vietnam start to improve rapidly when they liberalized the banking system and started taking foreign investment? Capital allocation really pulls the world forwards, but many of the gains are subtle and hidden while the failures are prominently on display.
    - palish 15y ago
      C'mon. You've been on Hacker News three years. We're not like the rest of the internet. Let's try this again. Pretend you're trying to convince Feynman that investment banking is a Good Thing. What specific points would you raise? (No one would disagree that iPads / streaming video are good. We would, however, disagree on how much "investment banking" has contributed to their existence.)
      - arethuza 15y ago
        In "A Colossal Failure of Common Sense", Patrick Robinson provides a pretty good example of a pretty useful thing that investment banks appear to do - providing liquidity in the market for distressed corporate bonds. He gives an example of some airline that announces it has financial troubles - immediately people holding the bonds they issue are pretty keen to sell, pretty much at any price. The bank have had very smart researchers who spot that the airline looks like it will be in trouble and then estimate how much the airline is really worth and then buy at below this price (based on their assets - planes). The people offloading the bonds are presumably pretty happy as they are worried they might be worthless and the bank is making some money off of the risk that their research might be wrong. Sounds like a pretty fair way of making money to me.
  - yummyfajitas 15y ago
    Whether or not you believe I-banking is a good or bad thing, it is utterly tangential to the main point I was making. The current crisis was caused because too many investment bankers were risk averse in the same way, not because they were risk taking.
  - rayiner 15y ago
    Investment banking as an umbrella term is pretty useful. Investment bankers have historically been professionals advising companies on financial issues. If you're Ford and want to construct a new factory, you go to an investment bank which helps you issue corporate bonds to finance the new factory. A factory gets built, which creates jobs and products for the market, and Ford and investors split the surplus from that action, with the former making more revenue and the latter getting interest payment. Investment bankers also handle acquisitions, IPOs, and other generally useful corporate finance, generally non zero-sum transactions. In return, the bankers are paid a fee for their services. The problem is that these traditional investment bank functions only make up something like 12% of the revenues of a traditional investment bank like Goldman Sachs: http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Investment_Banking_.2812.25_of_revenue_in_2010.29.07UNIQ63d1795f1375455-nowiki-00000027-QINU1.07UNIQ63d1795f1375455-nowiki-00000028-QINU http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Inve... Most of the rest of the revenue comes from trading and other activities of questionable utility.
Joakal 15y ago
It actually makes sense. If you run the IT department, you have to risk giving almost all the code to developers who can then put it in an email to themselves. The alternative is draconian restrictions that stifle creativity, freedom and leadership. Trust, is very important.
- ars 15y ago
  I don't know why you were downvoted, but it's usually best not to mention it in the post. Most of the time it gets fixed by later moderators. (At least if the story is popular.)
  - Joakal 15y ago
    I'm at 0 now. I've removed that edit for now. Just wondered why it was very negative. (The edit stated I was at -2 and asked why I was downvoted)
- deepGem 15y ago
  Well my friend, u've just drawn the wrong analogy here. Perhaps you have little or no idea of large scale software development. No developer can take a piece of code with him/her - implications are horrible. Even if they did, the code is probably worthless unless they managed to steal the entire code base. Assuming someone manages to accomplish this, it'll still take time for the damage to occur and by then the theft will be discovered. What these traders do is, from my understanding, far more risky and the chances of someone discovering their 'wrong trade' before the damage is incurred is probably nil. That's why u always hear that the trade lost so much money. U never hear, the trade was about to lose so much money and someone averted it.
danssig 15y ago
Yes exactly. Having worked for several big banks it is simply inconceivable that no one knew what this guy was doing. Which is probably why his immediate boss resigned immediately after the police took him away.
- deleted 15y ago
  [deleted]
- sek 15y ago
  The same situation with Jerome Kerviel, he did this for a long time and nobody complained as long as he made Money.
- morsch 15y ago
  That's not exactly the point he is making, though: They’re not "rogue" for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys "rogue traders" when they make a billion dollars gambling. [...] In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.
- matwood 15y ago
  immediate boss resigned The CEO should resign. Either the company lost $2B and is now pinning it on a 'rogue' trader or their security is flat out incompetent. Either way, all of the CxO positions should be tossed out. The whole things stinks really. $2B is A LOT of money to lose. With that sort of money flying around and the amount of power those involved likely have, it's easy to see them leveraging the criminal system to CYA and stick this to some underling.
  - maxxxxx 15y ago
    If the guy had made 2 billion by accident the CEO would get credit for it and take a big bonus home. It again shows how messed up the system is. The big guys have all the upside but pretty much no downside.
DanielBMarkham 15y ago
From the title I expected the article to inform me about why this wasn't a rogue trader, that is, some new information about this particular case. Instead I get a long rant about the evils of investment bankers. Might be a great political point, and it was certainly a nice rant, but it had nothing to do with the title except in the broadest sense. In short, I felt tricked to read the piece. There was only a sentence or two to directly support the title. The rest was a screed on the generic problem. This is the kind of article where people who are pissed about bankers (and I count myself among them) will read and nod their heads and totally agree with the author -- all the while forgetting that the meat of the article provides much heat, little light.
- pardo 15y ago
  I can find at least 4 paragraphs directly related to the title, explaining why the author considers this is not a case of a "rogue trader" but of a "rogue industry". That's about 25% of the article devoted exactly to what the title says (the rest of the article giving useful background for the author point in this 4 paragraphs). I wouldn't say that the title is deceiving.
  - DanielBMarkham 15y ago
    Yes but instead of addressing this specific case, the author spends his time ranting and waving his hands around about the industry in general. Hell, I already knew all of that. I clicked on the article because I expected something about this particular case. If that's not deceiving, then anybody can write an article about just about anything. Just move to the general case, throw in a lot of invective, and dance a bit. You could write stuff like this on an assembly line. I'll put this a different way: this is an editorial piece. As such, it's a nice one. I liked it. But it's not a news article, which was what I was expecting. It just takes a news article and sticks it on top of some pre-canned outrage.
    - anon1385 15y ago
      I'll put this a different way: this is an editorial piece. As such, it's a nice one. I liked it. But it's not a news article, which was what I was expecting. You were expecting a news article from something with a title ending in the words "My Ass"?
teyc 15y ago
I'm still very interested in these fraud cases. The main reason being that one person has effectively social engineered/hacked their way past bank internal controls. Imagine if UBS had inadvertently hired a crew of Anonymous, they would be totally sunk.
- chopsueyar 15y ago
  They seem to be doing a dandy of a job without Anonymous.
shapeshed 15y ago
I have made a start at replacing the investment banking system with a tiny shell script. https://gist.github.com/1222010 https://gist.github.com/1222010 Feel free to fork and improve.
- cpeterso 15y ago
  And if you are looking for some advice when investing in the stock market: get_hot_stock_tip() { ACTIONS=($"Buy" "Sell"); ACTION=${ACTIONS[$((RANDOM%2))]}; STOCK=`</dev/urandom tr -cd A-Z | head -c$((RANDOM%4+1))`; echo "$ACTION $STOCK"; } Sell GUF Sell LNT Buy WILK Buy EWM Sell RLAO :)
ddw 15y ago
I found this funny: http://www.eschatonblog.com/2011/09/unauthorized_16.html http://www.eschatonblog.com/2011/09/unauthorized_16.html "I think even I could code the little trading computer with something like "if bet>$1 trillion, deny authorization." Or, ok, these things are complicated, how about if "Probability of loss>$1 trillion is >.00001 then deny authorization."
- StrawberryFrog 15y ago
  The devil is in the details, specifically in working out the probability of loss. The whole point is to know that a bit better than the other guy. See also: putting your trust in AAA rated mortgage-backed securities.
- gwern 15y ago
  That is pretty hilarious. If only things were that easy...
- arethuza 15y ago
  I worked for a bit on the mid 90's on a distributed real-time risk management tool that was based on simplified VaR calculations. From what I recall, the calculation of a "risk" value for an individual trade isn't too bad but it gets exciting when you try to do this for a lot of trades across a complex portfolio - especially when you have to factor in other kinds of risk (e.g. forex). I was the lead software guy and it was fascinating to work with the ex-traders who were providing the financial knowledge. A shame that the product died horribly due to litigation on contractual issues.
iqster 15y ago
Q: What do you call a 'Rogue Trader' who makes a 2 billion dollar profit? A: Managing Director - Heard this on CNBC just now (attributed to the "Twittersphere")
Symmetry 15y ago
As long as we structure the incentive of organizations to get them to take on as much risk as possible (though bailouts on the downside), arbitrary external limits on how much risk they can take on will just result in them finding ways to work around them. Like by giving lots of freedom to ambitious young guys and saying "Don't do anything too risky, though if by some chance you make lots of money we'll give you a big bonus".

131 points by bootload 15y ago

It's not just investment bankers that have an appetite for this. It's a human problem - greed, and short-term thinking. Given the right environment and rules, and most humans would act the same way. The key is to prevent that environment from flourishing. Don't give them so much leverage. If you got $100 million in the bank, don't freaking let them trade $1 billion. Don't let them loan $1 billion. If I ask for $100 million back today, you better give it back TODAY.. not tomorrow.. not next week.. NOW. The analogy in the internet world is SEO, and gaming the search engines.

yummyfajitas 15y ago

I'm not sure what the relevance of investment banker's "huge appetite for risk" is. The current crisis was caused by people making AAA-certified safe bets, most of which were done in order to comply with Basel II and other capitalization requirements [1]. And even ignoring capitalization-driven demand, a long position on housing was considered a safe bet. If anything, we needed more risk taking and more derivatives - bankers willing to bet against the crowd, and derivatives which give them the ability to take a short position. [1] If a commercial bank wants exposure to housing, all they needed to do is make some loans. But various bank safety regulations encouraged them to hedge their risks by selling off the loans and purchasing AAA paper in order to hedge against mortgage risks in their local market.

palish 15y ago
The relevance is: "investment banking" may have done more harm than good. (As in, consider their whole existence. What might the world have been like without investment banking?)
- RockyMcNuts 15y ago
  do you think Google would exist, and they would have been able to raise money for a massive server farm, if initial investors didn't know they would be able to IPO it if it was successful? do you think the market for YC startups would be hot if there was no public stock market for companies to raise the money to buy them?
- phyalow 15y ago
  No Major Corporations, or capital raising/lending.
  - Roboprog 15y ago
    You say that like it's a bad thing :-) OK, the second is probably a bad thing. "Major corporation" seems to leave a bad taste in my mouth, though. Probably because monopolistic companies are run like Soviet Politburos with idiotic wasteful top-down planning -- "corporate communism".
- lionhearted 15y ago
  > (As in, consider their whole existence. What might the world have been like without investment banking?) It's a seen-and-unseen problem. Wages rising for the same activity is actually rare and historically really weird. The chief way people improve in the world is to automate/creative destruction old professions in favor of more modern ones, and through lower costs due to efficiency. Investment banking enables and accelerates both of those processes. It's a stretch, but not insane to think that, say, streaming video or iPads might not exist without investment banking. Someone replies, who cares about iPads or streaming video? But how much have, say, TED talks enabled thinkers to make progress on hard important problems? The causal chains here are long and complex, it's hard to say for sure. But creative destruction and replacement of old industries with new means better professions, and reducing costs is the other chief way to prosperity. You know about the huge blowups because they're noteworthy, you don't consider what industries wouldn't exist without a gradual re-allocating and efficiency, freeing up more people to do higher level work and driving costs down. It's hard to do mentally, inevitably someone will reply, "LOL, this guy thinks without investment banking there'd be no iPad!! That's all Jobs and Woz dude!!" I don't know. Maybe. But why is South Korea so much nicer to live in than South Vietnam? Why did South Vietnam start to improve rapidly when they liberalized the banking system and started taking foreign investment? Capital allocation really pulls the world forwards, but many of the gains are subtle and hidden while the failures are prominently on display.
  - palish 15y ago
    C'mon. You've been on Hacker News three years. We're not like the rest of the internet. Let's try this again. Pretend you're trying to convince Feynman that investment banking is a Good Thing. What specific points would you raise? (No one would disagree that iPads / streaming video are good. We would, however, disagree on how much "investment banking" has contributed to their existence.)
    - arethuza 15y ago
      In "A Colossal Failure of Common Sense", Patrick Robinson provides a pretty good example of a pretty useful thing that investment banks appear to do - providing liquidity in the market for distressed corporate bonds. He gives an example of some airline that announces it has financial troubles - immediately people holding the bonds they issue are pretty keen to sell, pretty much at any price. The bank have had very smart researchers who spot that the airline looks like it will be in trouble and then estimate how much the airline is really worth and then buy at below this price (based on their assets - planes). The people offloading the bonds are presumably pretty happy as they are worried they might be worthless and the bank is making some money off of the risk that their research might be wrong. Sounds like a pretty fair way of making money to me.
- yummyfajitas 15y ago
  Whether or not you believe I-banking is a good or bad thing, it is utterly tangential to the main point I was making. The current crisis was caused because too many investment bankers were risk averse in the same way, not because they were risk taking.
- rayiner 15y ago
  Investment banking as an umbrella term is pretty useful. Investment bankers have historically been professionals advising companies on financial issues. If you're Ford and want to construct a new factory, you go to an investment bank which helps you issue corporate bonds to finance the new factory. A factory gets built, which creates jobs and products for the market, and Ford and investors split the surplus from that action, with the former making more revenue and the latter getting interest payment. Investment bankers also handle acquisitions, IPOs, and other generally useful corporate finance, generally non zero-sum transactions. In return, the bankers are paid a fee for their services. The problem is that these traditional investment bank functions only make up something like 12% of the revenues of a traditional investment bank like Goldman Sachs: http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Investment_Banking_.2812.25_of_revenue_in_2010.29.07UNIQ63d1795f1375455-nowiki-00000027-QINU1.07UNIQ63d1795f1375455-nowiki-00000028-QINU http://www.wikinvest.com/stock/Goldman_Sachs_Group_(GS)#Inve... Most of the rest of the revenue comes from trading and other activities of questionable utility.

Joakal 15y ago

It actually makes sense. If you run the IT department, you have to risk giving almost all the code to developers who can then put it in an email to themselves. The alternative is draconian restrictions that stifle creativity, freedom and leadership. Trust, is very important.

ars 15y ago
I don't know why you were downvoted, but it's usually best not to mention it in the post. Most of the time it gets fixed by later moderators. (At least if the story is popular.)
- Joakal 15y ago
  I'm at 0 now. I've removed that edit for now. Just wondered why it was very negative. (The edit stated I was at -2 and asked why I was downvoted)
deepGem 15y ago
Well my friend, u've just drawn the wrong analogy here. Perhaps you have little or no idea of large scale software development. No developer can take a piece of code with him/her - implications are horrible. Even if they did, the code is probably worthless unless they managed to steal the entire code base. Assuming someone manages to accomplish this, it'll still take time for the damage to occur and by then the theft will be discovered. What these traders do is, from my understanding, far more risky and the chances of someone discovering their 'wrong trade' before the damage is incurred is probably nil. That's why u always hear that the trade lost so much money. U never hear, the trade was about to lose so much money and someone averted it.

danssig 15y ago

Yes exactly. Having worked for several big banks it is simply inconceivable that no one knew what this guy was doing. Which is probably why his immediate boss resigned immediately after the police took him away.

deleted 15y ago
[deleted]
sek 15y ago
The same situation with Jerome Kerviel, he did this for a long time and nobody complained as long as he made Money.
morsch 15y ago
That's not exactly the point he is making, though: They’re not "rogue" for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys "rogue traders" when they make a billion dollars gambling. [...] In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.
matwood 15y ago
immediate boss resigned The CEO should resign. Either the company lost $2B and is now pinning it on a 'rogue' trader or their security is flat out incompetent. Either way, all of the CxO positions should be tossed out. The whole things stinks really. $2B is A LOT of money to lose. With that sort of money flying around and the amount of power those involved likely have, it's easy to see them leveraging the criminal system to CYA and stick this to some underling.
- maxxxxx 15y ago
  If the guy had made 2 billion by accident the CEO would get credit for it and take a big bonus home. It again shows how messed up the system is. The big guys have all the upside but pretty much no downside.

DanielBMarkham 15y ago

From the title I expected the article to inform me about why this wasn't a rogue trader, that is, some new information about this particular case. Instead I get a long rant about the evils of investment bankers. Might be a great political point, and it was certainly a nice rant, but it had nothing to do with the title except in the broadest sense. In short, I felt tricked to read the piece. There was only a sentence or two to directly support the title. The rest was a screed on the generic problem. This is the kind of article where people who are pissed about bankers (and I count myself among them) will read and nod their heads and totally agree with the author -- all the while forgetting that the meat of the article provides much heat, little light.

pardo 15y ago
I can find at least 4 paragraphs directly related to the title, explaining why the author considers this is not a case of a "rogue trader" but of a "rogue industry". That's about 25% of the article devoted exactly to what the title says (the rest of the article giving useful background for the author point in this 4 paragraphs). I wouldn't say that the title is deceiving.
- DanielBMarkham 15y ago
  Yes but instead of addressing this specific case, the author spends his time ranting and waving his hands around about the industry in general. Hell, I already knew all of that. I clicked on the article because I expected something about this particular case. If that's not deceiving, then anybody can write an article about just about anything. Just move to the general case, throw in a lot of invective, and dance a bit. You could write stuff like this on an assembly line. I'll put this a different way: this is an editorial piece. As such, it's a nice one. I liked it. But it's not a news article, which was what I was expecting. It just takes a news article and sticks it on top of some pre-canned outrage.
  - anon1385 15y ago
    I'll put this a different way: this is an editorial piece. As such, it's a nice one. I liked it. But it's not a news article, which was what I was expecting. You were expecting a news article from something with a title ending in the words "My Ass"?

teyc 15y ago

I'm still very interested in these fraud cases. The main reason being that one person has effectively social engineered/hacked their way past bank internal controls. Imagine if UBS had inadvertently hired a crew of Anonymous, they would be totally sunk.

chopsueyar 15y ago
They seem to be doing a dandy of a job without Anonymous.

shapeshed 15y ago

I have made a start at replacing the investment banking system with a tiny shell script. https://gist.github.com/1222010 https://gist.github.com/1222010 Feel free to fork and improve.

cpeterso 15y ago
And if you are looking for some advice when investing in the stock market: get_hot_stock_tip() { ACTIONS=($"Buy" "Sell"); ACTION=${ACTIONS[$((RANDOM%2))]}; STOCK=`</dev/urandom tr -cd A-Z | head -c$((RANDOM%4+1))`; echo "$ACTION $STOCK"; } Sell GUF Sell LNT Buy WILK Buy EWM Sell RLAO :)

ddw 15y ago

I found this funny: http://www.eschatonblog.com/2011/09/unauthorized_16.html http://www.eschatonblog.com/2011/09/unauthorized_16.html "I think even I could code the little trading computer with something like "if bet>$1 trillion, deny authorization." Or, ok, these things are complicated, how about if "Probability of loss>$1 trillion is >.00001 then deny authorization."

StrawberryFrog 15y ago
The devil is in the details, specifically in working out the probability of loss. The whole point is to know that a bit better than the other guy. See also: putting your trust in AAA rated mortgage-backed securities.
gwern 15y ago
That is pretty hilarious. If only things were that easy...
arethuza 15y ago
I worked for a bit on the mid 90's on a distributed real-time risk management tool that was based on simplified VaR calculations. From what I recall, the calculation of a "risk" value for an individual trade isn't too bad but it gets exciting when you try to do this for a lot of trades across a complex portfolio - especially when you have to factor in other kinds of risk (e.g. forex). I was the lead software guy and it was fascinating to work with the ex-traders who were providing the financial knowledge. A shame that the product died horribly due to litigation on contractual issues.

iqster 15y ago

Q: What do you call a 'Rogue Trader' who makes a 2 billion dollar profit? A: Managing Director - Heard this on CNBC just now (attributed to the "Twittersphere")

Symmetry 15y ago

As long as we structure the incentive of organizations to get them to take on as much risk as possible (though bailouts on the downside), arbitrary external limits on how much risk they can take on will just result in them finding ways to work around them. Like by giving lots of freedom to ambitious young guys and saying "Don't do anything too risky, though if by some chance you make lots of money we'll give you a big bonus".