The most interesting signals from UBS will come over the next 6 months or so as various people are quietly sidelined and/or 'encouraged to move on'. The former positions of those people will tell watchers quite a bit, although some care must be taken to avoid jumping to the wrong conclusions. If heads roll high in the Operations department it doesn't necessarily mean that Ops was most fundamentally at fault; it could just be that Compliance shouted loudly and pointed the finger early enough to avoid too many awkward questions about its role. It's shocking how many decisions in a bank are taken on the basis of who can shout loudest and wave their willy most vigorously. Someone on the board is going to have to go, so the question is whether it is someone representing London (the location gets the blame), or Operations/Compliance (failure to detect gets the blame).
What was the trigger for the loss? He was dealing with ETFs, so you'd think that if he was trading on an exchange then the margin calls as his position moved underwater would have sounded bells - you'd hope that even an incompetent bank would notice a huge and growing flow of money out the front door. Zero Hedge has speculated that he was very long the volatility of the Swiss Franc (CHF) which has been moving around like no-one's business over the past few months; however, once the Bank of Switzerland announced that it would hold CHF below $1.40 by printing as many francs as required to do so, volatility dropped off a cliff. The timing seems plausible for this to be related, but could be just coincidence. If it was this sudden then perhaps the margin calls were similarly sudden.
How did he get himself in this position without anyone noticing? The story of Jerôme Kerviel at SocGen is striking in its similarities - successful trader, sudden billion-sized loss, turns out to be unauthorised trading. One wonders if Kweku was the only one who thought that the firm's controls need not apply to him, or if a loose attitude towards controls and Compliance was prevalent among his peers and immediate superiors.
If I were a UBS shareholder I'd be asking pointed questions of various people and organizations. To wit:
- Operations: how was this position's VaR calculated? Was it calculated at all? If not, how did a contract backed by UBS avoid being flagged as missing a VaR calculation? If so, who implemented the VaR calculation and how was it faulty? What process was used to verify VaR calculations?
- Compliance: who was responsible for training and verifying this desk's compliance issues? What procedures were they following? Who wrote these procedures? Was it operator error or design that made them fail to identify this position?
- The FSA: how did UBS in London fail to implement suitable controls on this desk? Who in the firm was ultimately responsible for checking this? Who in the FSA was responsible for verifying the competence and actions of the firm representatives? Since the episode with Kerviel, what extra checks were added to detect that kind of fraud and why did they not work this time around?
- Kweku himself: if we promised not to sue you personally for the loss, could you point us at other places in the firm where this may be going on?
Traders and managers at the other banks must be regarding this with a mixture of amusement and concern. The former because Schadenfreude is an integral part of trading, and the latter because if this can happen in a bank where Compliance and the FSA were previously satisfied with its controls, why couldn't it happen in their own bank?
Update: UBS announces it wasn't the CHF trade but rather S&P, DAX and EuroStoxx positions, with risk offset by fictitious positions. So Kweku could cover multi-$bn positions with matching multi-$bn fictitious positions. Somehow this doesn't reassure me.