John Vickers needs to write a thank you note to Kweku Adoboli. On the face of it, they have very little in common. Vickers, silver-haired and a knighted academic, is a far cry from the 31-year-old party-loving Adoboli of African origin. Still, they are in the spotlight this week and inextricably linked. Adoboli’s trading action earlier this week, that caused a $2 billion loss at Switzerland’s largest bank UBS, has just cemented Vickers’ argument for ring-fencing investment banking operations from retail. Vickers plea for isolating high risk is something regulators worldwide can no longer afford to ignore.
As chairman of the UK-appointed Independent Commission on Banking, Vickers has argued that the investment banking operations of banks that have bled billions of dollars in losses since the 2008 financial crisis began be kept at an arm’s length from the retail operations which hold deposits of thousands of ordinary people who save. If adopted, the recommendations would provide a safer banking system from 2019, at least in Britain. The UK has already spent £65 billion of taxpayer money rescuing Lloyds and RBS, so it’s hardly surprising that the public wants more stringent rules in place.
Some three years ago, when rogue trader Jerome Kerviel caused a multi-billion dollar hole in the books of Societe Generale, banks sat up and said they would put in place systems to ensure such trades are prevented because of eagle-eyed monitoring and systems. We now know that just isn’t possible, and if it is, then it hasn’t happened.
Both Kerviel and Adoboli were 31 when they caused trading losses that crippled their banks. They both worked on trading desks known as Delta-one, apparently a low-risk area where small movements in price offer opportunities for big profits. In both cases, it resulted in equally big losses.
The $2 billion loss sustained by UBS comes at a time when several European banks are already grappling with a separate set of problems from holding government debt that's gone bad. They hardly have the ability to stomach risky deals that may sour. Besides, the Swiss bank itself is just about hobbling back after being rescued by the government. Adoboli’s actions, three years after the Kerviel episode, have exposed that the high-risk, high-reward game is still very much on and few bankers have learnt any lesson from the 2008 crisis.
In fact, the stakes are so high that lapses can go unnoticed until they reach blowout amounts. For UBS that somewhat equals the kind of money the bank would save by the 3,500 jobs cuts that it announced recently. What's worse, more might end up losing their jobs to rein in costs and prevent more losses. So, Vickers is also right in asking not just for tighter regulation but also lower pay and rewards so that bankers know there is a reasonable limit to what can be gained personally from risking money that doesn’t quite belong to them.
Additionally, there has to be a lot more to be lost if their instinct goes wrong. Investment banks then should have no greater protection than a poorly-run manufacturing unit that doesn’t keep track of margins and inventory and runs into a loss to eventually go bust. Taxpayers shouldn't be expected to insure bad bets.
Adoboli apparently lived in a London apartment that cost him £1,000 a week in rent. That's nearly £48,000 in yearly rental, a lot higher than the average UK annual wage of £26,000.
For the financial world to get back on its feet and stay there, banking needs to be pared down into an ordinary job done by ordinary people.
Anjana Menon is Executive Editor, NDTV Profit
