The title must have given some ideas about what this post is going to be on – about monies hoarded in Swiss banks by Indian politicians.
Sorry to disappoint you.
A rogue trader at UBS, a giant Swiss bank seems to have defrauded it of USD 2 billion. Don’t ask me how or for any other details, as I cannot even comprehend what is Rs. 9,200 crores. I am one of those people who count my hundred rupee notes twice before making a payment. Now you understand, I am sure.
Anyway, the connection between Indian politicians and this Swiss bank traverses some territories very familiar to Indians. I give below an internal memo the bank’s Group Executive Board sent to the employees in the wake of this real breaking news. I chanced upon it in a news report in the New York Times of September 15, 2011 (UBS Reports $2 Billion Loss by Rogue Trader - Matthew Saltmarsh)
The internal UBS memo:
Dear colleagues,
We regret to inform you that yesterday we uncovered a case of unauthorized trading by a trader in the Investment Bank. We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated, but we currently estimate the loss on the trades to be around 2 billion US dollars. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.
We understand that you have already had to contend with unfavorable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm.
We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times.
We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened. We will keep you updated on the progress of our investigation.
Yours,
The Group Executive Board
I would like to direct your attention to a few sentences / phrases.
One, the dispatch says, “We have reported it to the markets in line with regulatory disclosure obligations.” Reading between the lines, the cynic notes that the bank may not have disclosed the matter had there been no regulations. Now, it becomes clear why the finance industry, even while licking its self-inflicted wounds, is loath to have tighter regulations. It is all about transparency, lack thereof, to be precise. Now, do you see the connection between Indian politicians and Swiss banks?
Two, “We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened.” This, to me, sounds eerily similar to government spokesperson’s unctuous statement delivered with doleful eyes, “We will get to the bottom of this incident / matter. No one found to be involved will be spared.”
Three, “While the news is distressing, it will not change the fundamental strength of our firm.” Is this not the regulation statement of Indian government spokesman? He might have added, “Our spirit will not be broken.” Excuse the bankers for missing this tag line.
But, I must admit to one major difference though: no politician, ever, will share this sentiment expressed by the bank, “We will keep you updated on the progress of our investigation.” This is the exception that proves the rule.
Indian politicians are Swiss banks personified, no more no less.
So, why shouldn’t they stash their money in those Swiss banks?
Raghuram Ekambaram
P.S Adding to the parallel sentiments of bankers and politicians (from The Economist, What's $2 billion between friends? September 15, 2011):
1. "...see themselves as masters of the universe rather than as servants of the taxpayer ..."
2. "...the crisis wasn't all the fault of the banks [my emphasis] but there were still plenty of errors of judgment that cast extreme doubt on whether they deserve their high salaries [my emphasis] ..." - substitute "politicians" for "banks", and "extensive privileges" for "high salaries" to get the exact parallels between politicians and bankers.
Sorry to disappoint you.
A rogue trader at UBS, a giant Swiss bank seems to have defrauded it of USD 2 billion. Don’t ask me how or for any other details, as I cannot even comprehend what is Rs. 9,200 crores. I am one of those people who count my hundred rupee notes twice before making a payment. Now you understand, I am sure.
Anyway, the connection between Indian politicians and this Swiss bank traverses some territories very familiar to Indians. I give below an internal memo the bank’s Group Executive Board sent to the employees in the wake of this real breaking news. I chanced upon it in a news report in the New York Times of September 15, 2011 (UBS Reports $2 Billion Loss by Rogue Trader - Matthew Saltmarsh)
The internal UBS memo:
Dear colleagues,
We regret to inform you that yesterday we uncovered a case of unauthorized trading by a trader in the Investment Bank. We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated, but we currently estimate the loss on the trades to be around 2 billion US dollars. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.
We understand that you have already had to contend with unfavorable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm.
We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times.
We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened. We will keep you updated on the progress of our investigation.
Yours,
The Group Executive Board
I would like to direct your attention to a few sentences / phrases.
One, the dispatch says, “We have reported it to the markets in line with regulatory disclosure obligations.” Reading between the lines, the cynic notes that the bank may not have disclosed the matter had there been no regulations. Now, it becomes clear why the finance industry, even while licking its self-inflicted wounds, is loath to have tighter regulations. It is all about transparency, lack thereof, to be precise. Now, do you see the connection between Indian politicians and Swiss banks?
Two, “We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened.” This, to me, sounds eerily similar to government spokesperson’s unctuous statement delivered with doleful eyes, “We will get to the bottom of this incident / matter. No one found to be involved will be spared.”
Three, “While the news is distressing, it will not change the fundamental strength of our firm.” Is this not the regulation statement of Indian government spokesman? He might have added, “Our spirit will not be broken.” Excuse the bankers for missing this tag line.
But, I must admit to one major difference though: no politician, ever, will share this sentiment expressed by the bank, “We will keep you updated on the progress of our investigation.” This is the exception that proves the rule.
Indian politicians are Swiss banks personified, no more no less.
So, why shouldn’t they stash their money in those Swiss banks?
Raghuram Ekambaram
P.S Adding to the parallel sentiments of bankers and politicians (from The Economist, What's $2 billion between friends? September 15, 2011):
1. "...see themselves as masters of the universe rather than as servants of the taxpayer ..."
2. "...the crisis wasn't all the fault of the banks [my emphasis] but there were still plenty of errors of judgment that cast extreme doubt on whether they deserve their high salaries [my emphasis] ..." - substitute "politicians" for "banks", and "extensive privileges" for "high salaries" to get the exact parallels between politicians and bankers.
17 comments:
Everything else apart, I'm left wondering how a fraud of this magnitude could go unnoticed by the bankers earlier, while the transaction took place in fact.
You know as much about banking as I do ... so, why you ask questions of me :))) USD 2 billion is nothing for these banks, you must understand. The daily foreign exchange transaction globally is in trillions USD, you must remember. Finance is the business of making profits out of moving money around. It adds no vale to the products that a civil society needs and desires. This is why you have exchange rate arbitrage, inflation arbitrage and so on. This is my understanding.
Raghuram Ekambaram
Unlike politicians, bankers would actually be interested in recovering what they lost, I think. Or in minimizing losses. Don't you agree? Heads do roll in those firms...
By the way, how much of transparency would you like in banking or financial industry?
True Arjun, but the bankers transfer the burden onto the taxpayers, just as they had done recently. Politicians too do likewise. In fact I see this as an additional parallel but one which goes without being identified in the memo!
I am not talking about transparency to the general public, but to the experts, including the auditors, rating agencies, the regulators.
Thanks.
Raghuram Ekambaram
Raghuram, it's all those arbitrages that I don't understand.
I find those words so funny. For example, a man came to my workplace last year because he was kicked out of his previous place where he was the boss. He came to my work place and introduced some new words because he was an Economics teacher before he became a Principal in some school from where he was expelled on moral grounds. Now through some political connections he is inducted in my workplace. Like many other oldies! He dictates terms here! Terms like arbitages!
I fail to understand the whole bastardly business.
That is good for you Matheikal, because not knowing about arbitrages keeps you at arms length from trouble, not at your workplace but in your life!
Basically as money has become so fleet footed differentials across the globe can be played up. This is what I understand.
Raghuram Ekambaram
So, why shouldn’t they stash their money in those Swiss banks?
I have been pondering on this statement ever since I read it and just wondering is this the reason why the middle class supports AH?
What he is prescribing is nothing but lane jumping in traffic terms all the fast, gherao, etc. The middle class is notorious in this aspect.
We never like to take responsibility for our actions and believe that the fault always rests with other party, he also prescribes the same
We believe there is an one stop solution for every problem and his simplistic suggestions also suggest the same.
No wonder we support him so much, again one more comment from me which does not have any relevance to the blog you have painstakingly posted :d
Balu, your comment is highly relevant and what more it has dug out details from the depths of the happenings of recent times.
I agree in toto with your statements and conclusions.
Thanks a lot.
Raghuram Ekambaram
After reading your blog ,I feel proud of our politicians.They seem to be using state of the art methods.
By the way,I am sure that the trader will have links with the Indian politicians.
Leave it up to you DS sir to dig out deeper meanings, like why to be proud of the politicians!
The second part of oyur comment - that line of thought started me out on this.
Thanks for endorsing.
Raghuram Ekambaram
Raghuram,
I think you might find this interesting:
http://www.reuters.com/article/2011/09/18/us-ubs-text-idUSTRE78H1G520110918
Have you seen a politician list out the losses quantitatively? By the way, most of these banks do have good risk mgmt. teams. Still a few rogues do manage to exist.
I am just trying to say that there is a fundamental difference between bankers and politicians.
Clients approach bankers on the basis of trust. Some of them are rogues (like any section of the population or any profession). Of course, people who are not clients (which might be the majority) might consider bankers to be non-trustworthy. For example, how most Indians view Swiss banks. But, that's just a matter of ideology.
With regard to politicians, it is another matter altogether. None (not even those who vote for them) trust them. Most are rogues.
Arjun,
My parallel between politicians and bankers is not strict. I wanted to point out that some of the instinctive reactions, as one can gleam from the internal memo and politicians' statements in the immediate aftermath of a crisis exploding are similar.
But, as regards tranparency, one does have to ask of the bankers, "Why are you so genetically opposed to regulations over your industry? Do you accept that the vaunted model of self-regulation has failed?" These questions have been asked and they have been ignored, not answered by the industry. What is the use of sophisticated risk management if the system is exposed to repeaetd failures (Societe Generale about 5 years ago was the last but one instance [ Jerome somebody, I don't remember the name). I have another question: Why are we only too ready to blame the Railway minister for an accident and ask for his or her head? This was a wrong path that lal Bahadur Sastry set us on. Why don't we say, "Things happen!" then. Did we say, "Things happen" with Union Carbide, with Fukushima Daiichi ... The issue cuts every which way.
I do not disagree with you except in that there may be an asymmetry in the way you treat finance industry mishaps and the general public treats all other mishaps.
Thanks for this extended engagement. I am seeting out to get to the link you have given.
Raghuram Ekambaram
Arjun,
I have read the link.
From my perspective, as fuzzy as it is, UBS's risk identification procedure itself was at fault. This is acknowledged in the statemetn thus:
"However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, (such mecahnisms were not foreseen! - my comment) allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits (where is the robustness of risk management? - my comment).
Following inquiries directed to him by UBS control functions (kicked in post facto only! - my comment) that were reviewing his positions, the trader revealed his unauthorized activity on September 14, 2011."
Here, the risk management procedure was not able to keep up with the new fangled so-called "innovations" in the finance industry. In my mind, there is a parallel between this and Areva's nuclear reactor design where redundancies were not as isolated as they must have been.
The sentiment that most of the politicians are rogues cannot intrude into any meaningful discussions. What other system is available that has not been tried out. Russia was corrupt when it was a dictatorship, when it was a oligarchy (which it still is). The US is afount of corruption - it always hunts with the fox and runs with the hare in its arms dealings. Its military "donations" to Egypt is the second highest, next to its offers to Israel. And you had the Arab Spring 30 years later. Remember, Obama went to Cairo and showered praise on Mubarak soon after he took te oath of office as President of the US. Which is the fox which the hare, I will leave it up to you decide. The splitting of largesse was done under Jimmy Carter, the supposedly "Simon pure" president of recent times. Don't you think he was corrupt? I do.
Raghuram Ekambaram
Raghuram,
Thanks a lot for the discussion.
Just a few thoughts about these rogues in investment banks and risk mgmt.
I think it is quite similar to an engineer or a divisional head trying to jack up profits of his group by compromising quality (say, reducing cement in concrete mixture or using inappropriate steel). If he is part of a huge infrastructure project, it might take some time for the "outlier" to catch the attention. Most probably, by then, a bridge or a tower would have collapsed. This is "Towering Inferno" storyline. Of course, there a big shot is involved - it could be middle-level guys.
In the last few years, there have been couple of such cases. As in the UBS case or SocGen's Kerviel, the rogues control a trading desk which is part of the large group (here, in UBS, I think he controls a trading desk within the Equity Division). In Kerviel's case, the superiors were also suspected. Kerviel really played the system, it seems - he fiddled at his level and also knew the system well-enough to manipulate stuff at the lower levels.
Raghuram, the risk mgmt systems are like engineering systems - largely automated and with several levels of independent manual checks, too. But for a person who is well-acquainted with the system, fraud is not impossible. Most of the trading books are audited by external agencies too. But that is less rigorous (they rely heavily on sampling) though more irritating.
From the UBS note, I have not been able to get the full maths. But, I guess he took large speculative positions/views. Now, he seems to have hedged (reduced the risk) with fictitious trades. For an outsider, it might seem strange that a fictitious trade went unnoticed. But with large trading books, it might not be difficult to slip it in. Risk mgmt guys must have focused on overall risk (profit-loss table at the trade level or book level) and along with the fictitious trades, it must have seemed ok.
I am trying to think of an analogy in the structural engineering side. But I know too little about that...:))) How do you build a bridge or a tower which on the large-scale seems really fine but is terribly unbalanced structurally (say, fictitious underground piling in swampy areas)?
Now, that is an interesting engineering question, isn't it? :)))
Thanks a lot for your time...
Yes Arjun, I will give you a structural engineering example, from about 80 years ago. The only difference is it was TRULY a mistake of ignorance and NOT malicious. The Tacoma Narrows Bridge disaster. In fact even the immediate postmortem was found to be wrong - it was NOT a question of vortex shedding.
The more recent example is the girder failing along the Purple line of DMRC. It precsiely matches the current incidence in some matters - the roguishness, in particular. I will also tell you it was all probably hushed up. So, I am not giving a clean chit to my profession.
These things do happen. But, I contend that politicians fail only when seen against a stricter set of standards than the economic entities, UBS, DMRC's contractor, Exxon, BP, Halliburton, Bechtel ... are asked to measure up to.
Indeed, I can show you a letter in a structural engineering magazine that explicitly states that the increase in the seismic coefficients that were mandated in the aftermath of the Bhuj earthquake will incentivise cutting corners. So, I am not sparing anyone. I am rather pointing out the asymmetry in our attitude towards politicians vis-a-vis others, in excusing their transgressions.
Raghuram Ekambaram
Dont worry. UBS will not fail. For if it came to that, the taxpayer will bail them out - too big to fail. So who really cares about risk management?
Yes Amrit, UBS will not be allowed to fail ... playing footsie with disaster once, with Lehman was enough!
Even if politicains want UBS and all the other too-big-to-be-allowed-to-fil institutions to be cut to size, the banks are too powerful for such voices to be carried to the relevant ears!
Raghuram Ekambaram
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