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09.16.11

The Hero Rogue Trader

While Kweku Adoboli lost UBS $2 billion, he may have ensured a key British banking reform becomes reality. William Underhill on how the case provides major government ammunition against the banks.

Kweku Adoboli may have cost his employers $2 billion, but he’s done the British government one big favor. On Friday the London-based equities trader at the giant Swiss bank UBS appeared before a court charged with fraud and false accounting. His alleged offense: taking bets in the market without his bosses’ knowledge and covering up their disastrous failure.

But the standard expressions of horror must conceal a quiet satisfaction in Westminster. Adoboli’s activities came to light just as ministers were squaring up for a fight with the banks over plans outlined earlier this week to force a separation of their retail and investment arms, an attempt to avert a repeat of the 2008 banking crash and the costly bailout that followed.

Inevitably, that brought a bleat of special pleading from the British banks: the suggested ring-fencing of their everyday High Street banking business would cost an estimated £7 billion ($11 billion) a year. London’s charms as a global financial center would suffer. And any quick reform of the banking system would jeopardize Britain’s all too fragile economic recovery.

Now Adoboli has provided useful underscoring for the government case: the “casino banking” operations that provided the investment banks with such generous profits bring risks that they simply cannot control. OK, banks can play with their own money, but customers and the taxpayers must be protected: no more rescues for entire institutions that have grown “too big to fail.”

The Adoboli case is a neat demonstration of the weakness of the present system. The 31-year-old was dealing in exchange traded funds, a notoriously arcane and risky area of business that involves gambling on tiny fluctuations in prices. Not only did he rack up vast losses—possibly the largest in the history of the City—but his gambles went unnoticed until Adoboli himself confessed to colleagues.

So much for the elaborate compliance and monitoring systems that are supposed to pick up such wrongdoing. Even the Swiss, supposedly models of caution, can’t prevent the determined cheat in the complex, high-speed world of trading. (Adoboli might have learned how to hide his losses during a stint in the UBS back office before he became a trader.)

It’s the timing that makes Adoboli’s object lesson in banking folly so valuable. News of his losses broke exactly three years after the collapse of Lehman Brothers.

Of course, Adoboli, the son of a Ghanaian diplomat, is not the first rogue trader to ruin his employers. Back in 1995, Nick Leeson managed to bring down Britain’s venerable Barings Bank through wild dealings on the Singapore market. (In a nice twist, Adoboli is using the same law firm that defended Leeson). In 2008, the French trader Jerome Kerviel cost employers Société Generale an eye-popping $6.8 billion.

But it’s the timing that makes Adoboli’s object lesson in banking folly so valuable. News of his losses broke exactly three years after the collapse of Lehman Brothers, the trigger for the global financial crisis. Meanwhile, market jitters across the world over the woes of the Eurozone were already forcing the authorities to look again at the security of their banking systems.

Back in Switzerland, UBS has been under scrutiny. Among the worst European victims of the banking crisis, it was obliged to write off $50 billion in 2008, and the country’s two largest parties, the Social Democrats and the Swiss People’s Party, had been pressing for a split between its investment banking and wealth-management divisions. As in Britain, that pressure now looks certain to intensify.

Earlier this month Adoboli mentioned on his Facebook page that he needed “a miracle.” If the British banks can now talk their way out of the proposed reform, it will be miraculous indeed.