UBS Fraud: Trainee Hire costs one month salary, but USD 2 billion on exit

A trainee by the name of Kweku Adoboli joined UBS Bank in 2006. Just like any other trainee, he wanted to learn about the thick jungle of Financial Markets, Capital Markets, Trading, Derivatives and the like. He was ambitious, yet a novice when he joined.

Question at this point. We will read on to answer these.
1.Does UBS hire only the best when comes to recruitment
2.Does the Bank ensure that the recruitment policies and processes are adequate to ensure that good, honest, hard working people are introduced in the organisation?

Anyway, the trainee soon became the Director of UBS Equity trading business, in less than 5 years. And this rise also included the 3 years from 2008 to 2011, with the largest financial crisis of recent times. So, did he have a magic wand or did he do spectacularly well to get such promotions to a Director position. How can he be so successful in a market that was so volatile.

One thing is certain today, he was a rogue trader. In simple terms, if you bet your whole life, your company’s entire Balance Sheet and the bet goes right, you make so much money for the bank that they all love you and promote you to the highest position and give you the best compensation and bonuses.

Points to note at this point.
1.But banks usually forget that there is always significant risk in getting that kind of profit.
2.If Banks could only see that Risk Adjusted return for our trainee is not all that great, maybe he would have been tamed, paid less and be in middle management.

Now comes 2011 and maybe some his largest bets goes the wrong way resulting in massive trading losses that were not disclosed a.k.a. unauthorized trading. The trader was part of the Trading circle called “Delta One”. Investment banks’ Delta One operations trade securities that attempt to track an asset closely

Some news articles about him report as follows. Read this very carefully. This is what UBS Management and Risk Dept and control functions and everyone else should have paid attention to.

  • “Play hard, work hard person”
  • “Had a string of attractive women at his luxury flat in London”
  • “Neighbours complained about his frantic party lifestyle”
  • "The newspaper sources said he earned GBP 600,000 in total compensation equaling to about Rs 4.5 crore a year. And at age 30?"
  • "His friends quoted that making money was his passion, not the spending of it."

    So what went wrong? The first of the few speculative theories is that his currency positions went horribly bad when the Swiss franc unexpectedly devalued. In other words, when the Swiss Franc was appreciating like never before, he would have extended positions to ride the wave resulting in large positions. Who would expect the central Bank to intervene so abruptly?

    Here is our take on this, not from how it happened, but how can companies reduce the probability of these things happening.

    1.Recruitment of people, even at the lowest levels in an organisation should be subject to the strictest recruitment policies, background checks, strong People Risk Assessment and Operational Risk Management frameworks

    2.Compensation should also be adjusted for risks undertaken. This has now been advocated in all regulatory reforms, IFC, Basel II, corporate governance reforms and the like. Just don’t reward for absolute profits. See how much risk the person undertakes.

    3.Risk Management systems and tracking models, tools are of no use if the process around it is weak. Too much reliance on these technologies is the ill effect of believing that you have the best technology. Instead of good technology, get the best and honest people and build a strong risk management and internal control framework

    4.Always question behavior outside of office. It is illegal to indulge in his personal behaviors when it comes to official work, but if you are aware of his personal lavish lifestyle, question it, have a 360 feedback highlight this aspect.

    5.A motivated and passionate person with a vision to make big money is good in a CEO office and not in the trading office. Reason is simple. If you bet big in CEO office, your actions are more transparent and questioned. The investor, analyst and board members are all at it. When Vikram Pandit of Citi was transforming Citi business after the financial crisis, his bets could have resulted in Citi going under, but every action was tracked. On the trading floor, they just are not tracked by people, instead technology is monitoring the actions, which can be manipulated.

    At Riskpro, we have build a strong operational risk management practice and promote products like PRAY – A People Risk Assessment tool that highlights top 5% risky employees based on multiple input factors, assessment questions etc. The tool captures lifestyle 24/7 not just 9-6pm. And the tool is inexpensive, SaaS based model that can help large organization to track employee behavior, and make meaning sense of that data.


    People Risk Assessment and Yield (PRAY)
    PRAY is your solution to quantify the people risk elements of yourorganisation. Besides providing a comprehensive people risk factor assessment, PRAY enables corporates to gain visibility on the top most riskiest employees when rated using a multi factor model.


    PRAY is a simple solution that can be implemented as a SaaS solution with little investment, yet providing significant value in the Human Capital Value chain. Riskpro is currently working on a end to end people risk management solution
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