Comment, analysis and other offerings from Friday’s FT,
In May, I wrote a column that warned that the fast-growing world of exchange traded funds was heading for a scandal, writes the FT’s Gillian Tett. To be honest, my expected timeline was years, not months. But history is playing out faster than I guessed. We do not yet know precisely what has gone wrong at UBS; and, in particular, with the conduct of Kweku Adoboli, the ETF trader. But when regulators eventually unpick this $2bn mess, I would hazard that one culprit will turn out to be a pernicious cocktail of opacity, complexity and naive enthusiasm for innovation. For what has happened in the ETF world in recent years has some uncanny echoes of what took place with collateralised debt products last decade; and the fact that it was those CDOs which caused such terrible damage for UBS in 2007 just reinforces the historical echoes. And the bitter irony.
Martin Wolf: Of course it’s right to ringfence rogue universals
Thank you, UBS. As a member of the UK’s Independent Commission on Banking, under Sir John Vickers, I could not have asked for a better illustration of the unregulatable risks to which investment banks are exposed than Thursday’s announcement of a loss of $2bn in “unauthorised trading”. No sane country can allow taxpayers to stand behind such risks, writes FT columnist Martin Wolf. That is the kernel of the case for ringfencing of retail banking from investment banking, recommended in the ICB’s final report. As John Kay argued on Wednesday: “Only if traditional retail banking is ringfenced can taxpayer guarantees be limited to personal and business depositors, and government funding of the banking system be directed to the needs of the businesses that create jobs and growth. That is the irrefutable case for the Vickers Commission recommendations.”
Sebastian Mallaby: A cheer for ECB’s attempt at shock and awe
At the start of the euro crisis, the continent’s politicians bristled with pride and independence, saying they did not need support from the International Monetary Fund, writes Mallaby, FT contributing editor. Soon enough, the IMF was allowed into the kitchen, but the rest of the world’s governments were excluded. Yet the crisis has now reached the point at which it threatens a teetering global economy, so with five central banks acting in concert on Thursday to backstop Europe’s banking systems, a new era of global financial co-ordination has begun. The catch is that the latest intervention addresses just one part of the continent’s problem. Banks in Europe fund themselves partially with dollars. Because of fears for their stability, investors have been balking at buying their commercial paper. Now, with the help of central banks in the US, Japan, Britain and Switzerland, the European authorities propose to provide the dollars that ca not be raised in the markets. This is excellent news for Europe’s banks, which is why their stocks are soaring. But it won’t solve Europe’s other problem, which lies with its sovereigns.
Editorial comment: Systemic failure in investment banks
The timing of UBS’s $2bn loss at the hands of a single trader could not have been better for supporters of profound banking reforms such as those proposed by the UK’s Vickers review. It could also not have come at a worse time for European banks, again in the grip of uncertainty. We must hope that the former outweighs the latter. Whatever else Kweku Adoboli, the UBS trader arrested in connection with the loss, has done, he has tilted the politics of banking regulation to the reformers’ advantage. The revelations come on the third anniversary of the Lehman Brothers bankruptcy. Everywhere, those who feel that bankers got away with reckless endangerment must be thinking: “There they go again.”
Lex on Delta one
The more they seek to leave the past behind, the more investment banks seem condemned to repeat it, Lex says. UBS is living up to that depressing trend. As the terms “Delta One” and “exchange traded funds” were linked with Kweku Adoboli, the 31-year-old UBS trader arrested in London on Thursday, what he worked on became clear. How he went allegedly “rogue”, however, is less clear. And therein lies the point: yet again an investment bank’s sophisticated risk controls have been rendered next to useless by an apparently straightforward business.