Once again the world of investment banking is reeling from a massive loss caused, apparently, by a “rogue trader“.
Kweku Adoboli, a UBS investment bank trader remains in police custody amid allegations that he cost the Swiss bank £1.3Bn. UBS has not officially confirmed Mr Adoboli’s role, however, an entry on his Linkedin site described him as director of exchange traded funds (ETF) and Delta One trading at UBS.
This operation, based within the equities division on the 3rd floor of the UBS office in London, was known regarded internally as being a key profit centre and highly valuable as it was deemed to be a risk free business unit. (There is no such thing!)
Much as with previous infamous traders such as Raj Rajaratnam (galleon Insider Trading), Bernie Madoff (Pozi Schemes), Nick Leeson (Barings Bank), Yasuo “Mr Copper” Hamanaka (Sumitomo Corp) and Jérôme Kerviel, (Société Générale) one has to question if compliance officers and senior management actually knew what was happening on the trading desk, or did they justsee a “black box” that produced money. If so, perhaps they didn’t want to look too closely at the gift horse’s teeth.
What are the trading instruments?
Delta One products are a financial derivatives carrying no optionality. That implies they carry a “delta” that is equal to or very close to 1.
What is “delta”?
The delta is the ratio of the change in price of an option to the change in price of the underlying asset, it can sometimes be called the hedge ratio and it applies to derivative products.
Consider a simple Call Option on a stock or a currency. The call option gives the holder the right, but not the obligation to acquire the said stock or currency at a specified future date or dates if it makes economic sense. So if the call option value is less than the spot market level on exercise day or days the option is in the money. If the stock were actually trading lower than the spot market, the option would not be exercised because the option would be “out of the money”.
For a call option on a stock, a delta of 0.50 means that for every $1.00 that the stock goes up, the option price rises by $0.50. As options near the end of their life or expiry, an in the money call option contract has a delta that approaches 1.0. In contrast an in the money put option (the right but not the obligation to sell) will have a delta that is approaching -1.00. (This is not the place for more complex mathematics)
Delta One have no optionality so their delta is 1 or very close to it…so the leverage or price relationship is perfect unity, for a given percentage move in the price of the underlying asset there will be an identical move in the price of the derivative. Delta One products will be seen as incorporating a number of underlying securities and as such give the holder an easy way to gain exposure to a basket of securities in a single product. (Swaps, Forwards, Futures and ETF). Did he get blind sided by the Swiss National Bank when they intervened in the FX market so forcing the Swiss Franc down by 8% against the Euro in day?
Given that trades have to be processed via the settlement office it does seem puzzling as to how such huge positions can be accumulated. It may be that as all banks have had to accumulate capital and control their costs on expenses and headcount any operation that is making a profit is encouraged to keep up the good work. Of course in C21 markets there is no longer a simple linear market in bonds or equities. Trades are made in cash instruments, futures, forwards, options, structures, special purpose vehicles, collateralized products and can be OTC or exchange based.
If a trader does not book an OTC trade at the appropriate time, red flags should rise as all trades need to be confirmed within a specified time limit from the execution. Still on a busy day, especially when markets are volatile the settlements office may not find out about the trade until the counterparty calls them days later asking why the deal has not been settled yet.
As finance professionals climb the ladder of success they assume more managerial activities that take them further away from the dealing floor and the latest techniques within asset structuring and trading…in the world on “my word is my bond”, the level of trust feels more like a layer of rust.
Did the board of directors of RBOS know about his affair? That is the most fascinating question arising from the lifting of the injunction on reporting of Sir Fred Goodwins affair with a colleague. CEO’s are frequently high profile individuals whose persona is stamped on the company they run. Think Virgin and Branson or Apple and Steve Jobs.
A recurring criticism of Goodwin was that he ran the company like a personal fiefdom with an abrupt and arrogant management style that seemed to encourage flunkies and discourage criticism and internal scepticism. The next few months will be interesting as we read more about the affair and how it impacted his decisions at the bank.
Board directors should pay attention: managing the company’s reputation is a board matter and if the CEO and company are inextricably linkedthey need to reassure themselves that their CEO is behaving with the utmost probity if it is not to impact share prices.
As for Sir Fred: well, he is already one of the most unpopular people in the UK. He has just shown us how to be even more unpopular.
Being plagued by Google auto-suggesting ‘scam’ with your name and directing people to a whole page of scam suggestions is a common problem for most. Well, this latest Google tweak could be the end to all your scam woes.
Google has stopped suggesting “scam” in suggestions and made life much easier for reputation managers. This is clearly huge for a company or a brand which has had to suffer monetarily and otherwise with the word ‘scam’ being suggested by Google.
Blogs like, Gr8 Example Of Google Drop Drown Suggesting Scam for Scam’s Sake, have been highlighting the problems companies had to endure both in reputation and in terms of enormous loss of revenue.
An active participation in the Google support forum under the head - Remove Google Suggest Keyword “scam” from my company name, has also been discussing Google scam suggestion issues. Often scam was being suggested when there weren’t many scam results in SERPs.
From today when you make searches, you will have to type the word “scam” and then you will get a clean page of suggestion even with Google Instant on and then press Enter to actually get to the results. No scam suggestions no more!
Surely a blow for review sites like Scam.com who have wielded enormous power over hapless companies with comments and postings in their forums which come up being auto-suggested by Google.
Clearly a much-needed reprieve for those who have been hit by scam posts by disgruntled employees, competitors, pranksters and the like.
Scam is not fully gone either: Google still suggests scam in related searches at the bottom of the results pages.
BofA has bought domains that contain their CEO’s name and the words “blows” and “sucks” in a well calculated move to stall the onslaught on their goodwill. Though it might sound like a bad joke for some, it could be a well timed RM strategy for BofA if everything works out fine.
It all happened like this – In December 2010 when Wikileaks’ founder, Julian Assange, announced that he has information that “could take down a bank or two”, many people assumed that one of these could be Bank of America. Though no names have come out as yet and everything is still a mystery, BofA is leaving nothing to chance and is making every effort to safeguard its goodwill and its CEO’s reputation by buying up all the negative keywords and domains. Read the rest of this entry »
Financial newbies anywhere would debate enthusiastically that Goldman Sach remains the most sublime commercial financial institution in the world. Most aspirant bankers would jump in to be associated with the firm as it remains the goal for many.
But for how long are they going to ride this much-believed wave? Till the banks carried on to make huge profits and assisted in economic growth, nobody questioned its intentions. But once the cards came crashing down in 2008, Goldman was first in the dismissal line. Read the rest of this entry »
If something comes down your chimney on christmas eve, it could just be somebody’s else bank statement courtesy of Santander Bank who have admitted sending 35,000 customers to the wrong addresses following what they termed a printing glitch. “Glitch” is the banking term for a monumental customer service cock-up from the bank with nearly the worst customer service reputation in the UK. Santander is the Spanish bank that seems (“seems”) to have avoided the Spanish property meltdown and has gone on a bit of a buying spree since 2007 buying the UK bank/building society Abbey. Since then it has managed to obliterate the bank’s customer service reputation regularly polling at the bottom of customer service surveys.
You really wouldn’t want to be a reputation manager at Santander. The bank has failed to deliver on many of its promises and the brand has picked up little traction since the massive rebrand over the past few years. Of course, bank reputations have not really recovered since 2008 and for most customers, one bank is equally as bad as another. However banks try to position themselves as a “friend for life”, most customers know that the friendship does not extend beyond the first second of an overdraft and they know that all banks are exactly the same!
Santander are likely to be fined heavily by the regulators at the FSA for their latest failing, but it would change the core challenge for banks to make themselves more central to their customers’ lives in a positive way.
No single company has had its reputation shredded quite like Bank of America over the past few years except for maybe BP, or ‘British Petroleum’ as President Obama likes to call them. Every day another story comes out over their processes around foreclosures and mortgages. Now Nevada and Arizona have filed suit against Bank of America saying it has been deceiving homeowners trying to avoid foreclosure. Read the rest of this entry »
Depending on your perspective the present court case between Guy Hands’ Terra Firma Group and Citigroup is either amusing, disconcerting or outrageous. This is the sort of case that is designed to rubbish the reputation of absolutely everybody involved. For most onlookers there is a certain schadenfreude leavened with a larger sense of incredulity: this is how these deals are done? Read the rest of this entry »
The last few years have put paid to the reputations of banks as
- good businesses and good business people
The more shadowy world of funds management and trusts has been largely ignored with the notable exception of hedge funds. Such fund managers who are in the public eye often give the industry as a whole a very good name – notably the Sage of Omaha, Warren Buffett. A recent post by semi-legendary London analyst Terri Smith presents a case for a major onslaught on the fund management industry as a whole and at the nub of it is the way fees are charged on investments. (You can read the post here)
What is notable is that there is an implication that his new fund will use a very different fee structure from which we can infer that there is likely to be a wider and louder marketing battle. Trust fund managers get used to the spotlight and the reputation damage that will likely ensue.
Many fund managers have limited brand presence: branding is not seen as significant within the Royal Mile and they have grown used to not being in the public eye but a new generation of net savvy investors are likely to be more vocal about your shortcomings in the future. One of the problems with poor brand equity is that small attacks have a disproportionate impact upon revenues. Lets face it when there are a lot of fund managers you can as easily use another if you have heard bad things about your first choice.
Companies tend to focus on their company reputation and more rarely on the overall reputation of their industry, although it is the wider reputation that tends to impact them over the long term. Most of us dont understand the intricacies of fund management and high finance. However, we can all understand high fees and percentages. There may now be a meaningful tool to whip the industry with.