26 February, 1995 is a date that is etched into the minds of many. It is a case study that every Finance student considers, from University to the CFA. 26 February, 1995 was the day Barings Bank, the UK’s oldest Investment Bank, was declared insolvent after a failed bailout attempt. The reason, a rogue trader’s $1.4 billion losses associated with derivative positions taken on the recovery of the Japanese economy after the Kobe Earthquake. Nick Leeson is a name that carries significant importance in the study of Finance and how horribly wrong things can go. However, despite this event being examinable in finance schools around the world, have we really learnt the Barings Bank lessons?
Mr Kweku Adoboli is the most recent rogue trader. Adoboli cost his firm, UBS, $2.3 billion and his CEO, Mr Oswald Grübel, his job. It was another case of unauthorised derivatives trading which hurt UBS’ Investment Bank which has struggled since near collapse in 2008. Adoboli’s actions raise a two key concerns, beyond those of the struggling UBS shareholders. First, why haven’t Investment Banks learnt from the Barings Bank and other similar disasters? Second, what role do, and should, the Regulators play in these kind of situations?
Internal control and management is the crux of what all finance students take from the Barings Bank disaster. However, UBS clearly didn’t heed this message. The Nick Leeson story was based in far too much responsibility for one person, with insufficient checks and balances. However, 16 years later it seems nothing has changed. UBS allowed Adoboli far too much freedom. There was a clear failure in the necessary checks and balances that allowed significant losses to be accumulated and such damaging trading techniques to be employed. It was these internal controls that led to the recent resignation of UBS CEO, Oswald Grübel.
However, it is human nature that is the ultimate cause in situations such as this. First, colleagues are unwilling to margin call their workmates when things aren’t going particularly well. Further, superiors are too busy themselves, driven by their own performance, to monitor the habits and activities of their juniors. If internal control and management is to change, so must the performance driven culture. Managers must act as managers and monitor their team if disasters as this are to be averted.
Second, truly independent auditors and regulators must play a greater role in our largest financial institutions. The repeal of Glass-Steagall and the move towards global deregulation has changed the financial landscape. However, there is a need for a regulatory framework if moral hazard is to be eliminated. After a 2008 bailout to the tune of over $30 billion, it is unacceptable that one UBS employee is able to lose $2.3 billion of taxpayer’s money. Further regulation and red-tape will certainly hamper efficiency and productivity, however more accountability is required of traders, not just management.
As the inquiries into the UBS disaster commence, the lessons will be learnt – the question is, for how long. Managers need to be charged with managing their teams, not managing their own budgets. Regulators need to meddle, albeit painful, to remind traders of the social impact their decisions can have. Auditors must be truly independent and must ask the tough questions, regardless of the potential impact on the business relationship. Overall, lessons must be learnt but it is not remembering, but reminding that is the key going forward. It is not enough to include these events in finance syllabi. There must be on the job reminders and monitoring to ensure these events don’t repeat themselves, yet again.