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PORTSIDE  September 2011, Week 3

PORTSIDE September 2011, Week 3

Subject:

'Rogue Trader' My Ass

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Date:

Sat, 17 Sep 2011 20:37:43 -0400

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text/plain (181 lines)

The The $2 Billion UBS Incident:

'Rogue Trader' My Ass

By Matt Taibbi
Rolling Stone
September 15, 2011

http://www.rollingstone.com/politics/blogs/taibblog/the-2-billion-ubs-incident-rogue-trader-my-ass-20110915

The news that a "rogue trader" (I hate that term - more
on that in a moment) has soaked the Swiss banking giant
UBS for $2 billion has rocked the international
financial community and threatened to drive a stake
through any chance Europe had of averting economic
disaster. There is much hand-wringing in the financial
press today as the UBS incident has reminded the whole
world that all of the banks were almost certainly lying
their asses off over the last three years, when they
all pledged to pull back from risky prop trading.
Here's how the WSJ put it:

    The Swiss banking giant has been struggling to
    rebuild trust after running up vast losses in the
    original financial crisis. Under Chief Executive
    Oswald Grubel, the bank claimed to have put in
    place new risk management practices, pulled back
    from proprietary trading and focused on a low-risk
    client-driven model.

All the troubled banks, remember, made similar promises
in the wake of the financial crisis. In fact, some of
them used the exact same language. Some will recall
Goldman's executive summary from earlier this year in
which the bank pledged to respond to a "challenging
period" in its history by making changes.

"We reviewed the governance, standards and practices of
certain of our firmwide operating committees," the bank
wrote, "to ensure their focus on client service,
business standards and practices and reputational risk
management."

But the reality is, the brains of investment bankers by
nature are not wired for "client-based" thinking. This
is the reason why the Glass-Steagall Act, which kept
investment banks and commercial banks separate, was
originally passed back in 1933: it just defies common
sense to have professional gamblers in charge of
stewarding commercial bank accounts.

Investment bankers do not see it as their jobs to tend
to the dreary business of making sure Ma and Pa Main
Street get their $8.03 in savings account interest
every month. Nothing about traditional commercial
banking - historically, the dullest of businesses,
taking customer deposits and making conservative
investments with them in search of a percentage point
of profit here and there - turns them on.

In fact, investment bankers by nature have huge
appetites for risk, and most of them take pride in
being able to sleep at night even when their bets are
going the wrong way. If you're not a person who can
doze through a two-hour foot massage while your client
(which might be your own bank) is losing ten thousand
dollars a minute on some exotic trade you've cooked up,
then you won't make it on today's Wall Street.

Nonetheless, thanks to the Gramm-Leach-Bliley Act
passed in 1998 with the help of Bob Rubin, Larry
Summers, Bill Clinton, Alan Greenspan, Phil Gramm and a
host of other short-sighted politicians, we now have a
situation where trillions in federally-insured
commercial bank deposits have been wedded at the end of
a shotgun to exactly such career investment bankers
from places like Salomon Brothers (now part of Citi),
Merrill Lynch (Bank of America), Bear Stearns (Chase),
and so on.

These marriages have been a disaster. The influx of i-
banking types into the once-boring worlds of commercial
bank accounts, home mortgages, and consumer credit has
helped turn every part of the financial universe into a
casino. That's why I can't stand the term "rogue
trader," which is always tossed out there when some
investment-banker asshole loses a billion dollars
betting with someone else's money.

They're not "rogue" for the simple reason that making
insanely irresponsible decisions with other peoples'
money is exactly the job description of a lot of people
on Wall Street. Hell, they don't call these guys "rogue
traders" when they make a billion dollars gambling.

The only thing that differentiates a "rogue" trader
like Barings villain Nick Leeson from a Lloyd
Blankfein, Dick Fuld, John Thain, or someone like AIG's
Joe Cassano, is that those other guys are more senior
and their lunatic, catastrophic decisions were
authorized (and yes, I know that Cassano wasn't an
investment banker, technically - but he was in
financial services).

In the financial press you're called a "rogue trader"
if you're some overperspired 28 year-old newbie who
bypasses internal audits and quality control to make a
disastrous trade that could sink the company. But if
you're a well-groomed 60 year-old CEO who uses his
authority to ignore quality control and internal audits
in order to make disastrous trades that could sink the
company, you get a bailout, a bonus, and heroic
treatment in an Andrew Ross Sorkin book.

In other words, "rogue traders" are treated like bad
accidents and condemned everywhere from the front pages
to Ewan McGregor films. But rogue companies are
protected at every level of the regulatory structure
and continually empowered by dergulatory legislation
giving them access to our bank accounts.

There is a movement in the UK for a thing called
"ringfencing" that would separate investment bankers
from commercial bankers. Some people think this UBS
incident will aid that movement, even though UBS can
apparently absorb the loss without necessitating a
bailout or endangering client accounts.

The U.S. missed its own chance for ringfencing when a
proposal for a full repeal of Gramm-Leach-Bliley was
routed during the Dodd-Frank negotiations.

That means we're probably stuck here in the states with
companies like Bank of America, JP Morgan Chase and
Citigroup, giant commercial banks in charge of
stewarding trillions in client bank accounts and
consumer credit accounts who also behave like
turbocharged gamblers via their investment banking
arms.

Sooner or later, this is going to blow up in our faces,
and it won't be one lower-level guy with a $2 billion
loss we'll be swallowing. It'll be the CEO of another
rogue firm like Lehman Brothers, and it'll cost us
trillions, not billions.
_________________________

c 2011 Rolling Stone

As Rolling Stone's chief political reporter, Matt
Taibbi's predecessors include the likes of journalistic
giants Hunter S. Thompson and P.J. O'Rourke. Taibbi's
2004 campaign journal Spanking the Donkey cemented his
status as an incisive, irreverent, zero-bullshit
reporter. His books include Griftopia: A Story of
Bankers, Politicians, and the Most Audacious Power Grab
in American History, The Great Derangement: A
Terrifying True Story of War, Politics, and Religion,
Smells Like Dead Elephants: Dispatches from a Rotting
Empire.

____________________

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Portside aims to provide material of interest to people
on the left that will help them to interpret the world
and to change it.

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