UBS and that missing $2.3bn: Rogue trader, rogue company or rogue industry?

Revelations last week that UBS, the Swiss-based global financial services company, had shipped close to $2.3bn due to "unauthorized trading" in its London investment banking division focused intense media speculation on the derivatives trader at the heart of the scandal, Kweku Adoboli. Earning himself the now familiar epithet of the "rogue trader", Adoboli also claimed the dubious honor of a position at number 3 in the all time Rogue Trader Top 10, placing well behind Jérôme Kerviel at number 1 (with nearly $7bn in losses), but close to Yasuo Hamanaka at number 2 ($2.6 bn) and well in front of Nick Leeson at number 4 ($1.3bn). Like those before him, Adoboli's losses have had grave repercussions for his employer and for the bank's stakeholders. UBS's share price dropped by 10% after the losses were reported, and with almost the entire quarterly earnings of the firm wiped out, the bank is reportedly aiming to accelerate a major restructuring of its business, involving thousands of job losses. Meanwhile UBS was quick to reassure its well-heeled customers that none of their money was at risk, though a downswing in the bank's reputation and overall trust levels seems inevitable.

The narrative of the "rogue trader" is a seductive one in making sense of events like those at UBS. A lone trader going off the rails, committing fraud to make himself rich - what could be a simpler explanation? But as with Kerviel, Leeson and others before him, Adoboli does not appear to have been seeking to profit directly from the unauthorized trades (although clearly would benefit indirectly in terms of a higher bonus if the gamble paid off). In reality it was more a case of taking an illegal route to try and make the firm more money. Likewise, Adoboli hardly fits the stereotype of the evil genius that many will picture when thinking of a rogue trader. By all accounts the Ghanaian born, 31 year old seems to be pretty unremarkable.  He likes art and photography. He's "very polite", "very loyal" to his employers a "really nice guy" according to the neighbors, even his former landlord speaks highly of him. He went to private school and graduated from a respectable university (Full disclosure: actually he studied at the University of Nottingham, and graduated whilst Crane and Matten were teaching there - but did not, we might add, attend our ethics class). Clearly, a major share of the blame for UBS's losses must rest of the person who cooked the books to keep his spiraling losses secret. But he's hardly much of a rogue, it has to be said.

So where does the rest of the blame lie? UBS itself certainly has to take a large proportion of the responsibility. After all, what kind of financial institution doesn't realize that one of its employees is taking such wildly speculative positions and then cooking the books to hide it? Adobodi appears to have been making some unauthorized trades since 2008. In the end it was the trader himself who blew the whistle on his activities, not those who were responsible for exercising financial control. Internal and external auditing, back office controls, risk management, compliance -aren't they supposed to stop this kind of thing happening? Moody's the rating agency is belatedly pointing at "ongoing weaknesses" in the bank's risk management."We have continued to express concerns with regards to the ability of management to develop a robust risk culture and effective control framework," the agency said in the aftermath of the last week's disclosures. But this is hardly news for a bank like UBS that lost $37bn in the subprime mortgage crisis and had to be bailed out by Swiss taxpayers.

Myret Zaki, the author of a best-selling book on the bank has presented the situation as "a never-ending story repeating itself". "I'm not surprised at all about this," she told the UK newspaper the Telegraph "[UBS CEO] Oswald Grubel kept advocating an increase in risk-taking. When you have a CEO talking like that, you are not in a climate where you feel restricted, as a trader. He was on the side of continuing to make money on the markets, even though wealth management was employing 30pc fewer staff for double the profitability." Others, such as Richard Abbey, the senior managing director of financial investigations at Kroll, point to UBS's recent downsizing as a factor: "It's no coincidence that after downsizing and lay-offs these type of losses are more common. There may not be enough people to physically control checks and balances. It may be institutions are too reliant on computer controls and they are the easiest to bypass." In many respects then this was a time bomb waiting to go off - with Adobodi as much the symptom as the cause. This could be "rogue bank" just as much as "rogue trader".

Taking a broader perspective on the scandal, maybe we don't need to stop the blame game at Adobodi  and UBS. As with the recent financial crisis, perhaps this is also a deeper rooted problem of the financial services industry as a whole. According to the Telegraph, "unauthorized" trading could be considerably more widespread than the occasional huge rogue trader incident suggests: "experts and insiders warn the amount of risky unauthorised trading is difficult to quantify and often not brought to the public eye unless losses are huge enough to be announced". The paper goes on to quote a "senior trader" at a London bank: "People are fired every year for having stuff on their book that they shouldn't. All the banks tend to know what has happened and why someone has left, but it doesn't get publicised. It's usually only a couple of million bucks." So while Adobodi may be number 3 in the rogue trader top 10, we never even get to hear about all those entries lower down the charts. Jérôme Kerviel, who's still there at the top of the list has suggested that companies like Société Générale, his then employer, may even tacitly endorse such trades as long as they are making the bank money. It's only when they start registering huge losses that the controls really kick in. As even the Wall Street Journal recently quipped: "what do you call a 'rogue' trader who makes $2 billion? A Managing Director!" These may of course be little more than jokes, rumors and groundless accusations. But clearly the financial services industry has a major task ahead of it to clean up its reputation and regain the trust of its stakeholders. The events at UBS are going to make that task even harder now. We don't just have a rogue trader on our hands. We have a rogue industry.


Photo by Ahmad Nawawi. Reproduced under Creative Commons Licence

Has 9/11 changed business ethics?

I can’t believe I just wrote this headline. Looking at today’s punch lines in North American papers or on TV, you can get the impression that 9/11 was the all defining event of the new millennium. And that pretty much nothing in the world has remained the same ever since.

There is a lot of hyperbole out there these days. As shocking as 9/11 appeared at the time the last decade has seen – in terms of loss of life or any other criteria we want to apply – much worse tragedies, injustices and atrocities. This includes a number of ways in which America and its allies have responded to 9/11 (8,500 American soldiers and contractors killed, 103.000 Iraqi civilians killed, according to today’s New York Times).

World politics aside – and there are more gifted minds and eloquent writers out there to address those issues – it’s still worth just engaging in this little thought experiment. So let’s play around with this thought for a second: if 9/11 is the day ‘that changed everything’ – what has its effect been on the niche of the world we are commenting on in this blog? Here are some thoughts off the cuff.

Blurring lines between the public and the private. 9/11 has given many governments new legitimacy in redefing the public and the private in their relation to their citizens. Email, phone conversations, financial records, tax statements are just prominent examples where governments have attempted to intrude the privacy of citizens – all of course in the name of fighting ‘the war on terror’. Conspicuously, many of this information is administered by private companies. Unsurprisingly, we then see that electronic privacy, identity protection and a host of other privacy issues have turned in ethical dilemmas for private business. Arguably, many of the ethical issues here would be on the agenda without 9/11 though, as the main driver of ethical contestation is the mere fact that advances in information technology have made those new ways of information gathering possible in the first place.

New business opportunities. Looking at how America and its allies have approached the wars in Iraq and Afghanistan it is evident that we have seen a surge in business opportunities for private military contractors, mercenary companies and security providers. As the Wall Street Journal investigation ‘Top Secret America’ has highlighted this also pertains to intelligence gathering, counterterrorism or homeland security. This all has propelled private business in a sphere traditionally occupied by governments and other – at least on paper – publicly and democratically accountable societal actors. Again, we can legitimately ask in how far this is really triggered by 9/11. As Naomi Klein has pointed out (‘The Shock Doctrine, Chapter 14), it was exactly on September 10, 2001, when Donald Rumsfeld held a Town Hall Meeting in the Pentagon announcing far flung privatization of military operations leading CNN to the headline on the very eve of 9/11: ‘Defence Secretary Declares War on the Pentagon’s Bureaucracy’! In this sense then 9/11 might have accelerated these developments and provided some much needed legitimacy – but the underlying ideas and intentions were hardly new.

Soaring government deficits. The current debate on government deficits in the US, UK and elsewhere is often directly linked to the so-called financial crisis of 2008/9. This however overlooks the fact that due to the ‘response’ to 9/11 certainly the US and the UK, had already heavily overstretched their budgets. The New York Times today cites a figure of $1.6trillion in costs for just the wars post-9/11. In some ways one could even argue that due to the constant distraction of two wars the looming financial disaster could grow largely unnoticed by governmental scrutiny. And the need to finance those wars made it all too tempting to keep interest rates low - with the widely known effects on cheap credit in America. As a result we now see more or less in all Western democracies an increase slashing of classic welfare state provision. As many commentators have pointed out retreating governmental provision of health, education or other public services has been a key driver in a shifting expectation towards business in engaging in these arenas – the UK probably being the best laboratory to substantiate that thesis.

New issues in diversity and discrimination. Certainly in the US, 9/11 has heightened scepticism towards all things Muslim. This is certainly reflected in tightened immigration laws and the general perception of the public. Conspicuously, there is relatively little case evidence that this has also played out in business. While gender or sexual orientation have been well documented there is only scant evidence of actual discrimination on the basis of being of Muslim faith. This may, however, be more credited to the fairly palpable ‘Teflon’ of political correctness with which those topics have been touched since then in business.

A multipolar world and the rise of China and India. One of the most interesting developments in the US has been its heightened restrictions on immigration of highly educated young people including those graduating from American universities. This has had a number of implications for business both in the US and the rest of the world. Most obvious are changes in those industries where America is still quite advanced, most notably IT, electronics and software. All these industries have in the past and still at present do rely heavily on an influx of foreign-born professionals. While it has become more difficult to hire this talent at home, places such as India have immensely benefited from this. Much of the software development and business process outsourcing of leading US companies is now done in Bangalore, Hyderabad or Mumbai. In this sense, with the US becoming less open to a free movement of people we see that this has benefited other parts of the global economy. This has also been visible in University education. Countries such as the UK, Canada or Australia have seen a surge in international students who found their ambition to study in the US rendered impossible after 9/11.

For business ethics this move towards a world where the US in many fields has lost a pole position is quite interesting. With growing business interests in emerging economies we see, at the same time, an interest in business responsibilities and ethics growing in these parts of the globe. We can certainly argue that the last decade has seen much stronger influence and relevance of other areas of the globe. Business ethics, 30 years ago, was by and large an American subject. This is no longer the case today.

Arguably, much of the changes we discuss here have a fairly tenuous link to 9/11 as such. The events had their most severe impacts on ethics in government, warfare, international relations and how governments have (dis-)respected basic human rights since then. Some of it, as we think, has had a trickle-down effect on business. But maybe the gist of it is still best summarized by commodity trader Carlton Brown in the movie The Corporation: ‘In devastation, there is opportunity!’

Photo by JessyeAnne, reproduced under the Creative Commons licence.

Lessons in politics from Starbucks: sign of the times or storm in a coffee cup?

Drip, latte, cappuccino, espresso, frappuccino; short, tall, grande, venti, trenta. Starbucks, the international coffee chain is great at giving choice in getting our daily dose of java. But what about campaign contributions or no contributions? Doesn't exactly roll off the tongue in the same way, but that is the stark choice that Starbucks CEO Howard Schultz is now offering US politicians in the face of the country's ongoing debt crisis. For the past few weeks Schultz has been seeking to build a coalition of US business leaders ready to join him in withholding campaign contributions from Washington until the main political parties start working together and agree a debt deal to turn around the beleaguered economy.

In the last few days Schultz has stepped up the campaign with full-page ads in the US press, including the New York Times, taking the form of an open letter on Starbucks headed paper to his "fellow citizens" to join him in "restoring hope in the American Dream" by sending "the message to today's elected officials in a civil, respectful voice they hear and understand, that the time to put citizenship ahead of partisanship is now".

It's quite a remarkable campaign. Schultz has the support of more than a hundred business leaders joining his pledge. Among those listed as "key supporters" on the campaign website are the CEOs of AOL, BBDO, NYSE, NASDAQ, Wholefoods Market and Zipcar. It is not such a significant coalition yet to cause the main political parties any real loss of sleep - compared with major contributors, most of these individuals and companies are not heavily involved in funding political parties. But for a business leader like Schultz to come out and so explicitly take a stand that effectively seeks to hold his domestic politicians to ransom until they do his bidding represents a fairly unique twist on the growing involvement of business in politics and the claim by corporations to be "good citizens".

In one sense, Schultz should be applauded for seeking to use his own and his company's economic muscle to try and achieve what he sees as a greater public good. Management guru, Rosabeth Moss Kanter, for instance has come out in favor of his "courage and leadership" in attempting to restore confidence. Even the more cynical corporate critics will find it difficult to see a clear-cut corporate self-interest at stake here. Sure it could help reinforce the famous Starbucks brand but at the same time its also going to annoy a lot of people too, especially those in Washington who are being labelled by Schultz and his CEO friends as having a "pervasive failure of leadership".

On the other hand, though, we might also question what's really going on here when we have a company CEO leveraging his company brand in such a way to make a political rather than an economic point, and at the same time claiming to be a "fellow citizen" with the rest of us (who can hardly afford to take out full page ads in the New York Times to present our own views on the current political logjam). This is not just Schultz the individual citizen speaking here but Schultz the corporate CEO and representative of Starbucks. But then, if (and it is a big "if") we accept corporations as political actors, then at least this example represents a fairly good case of building coalitions, providing an arena for free and fair deliberation, and moving beyond mere corporate self-interest.

To our mind the whole situation presents a really interesting insight into the emerging political role of the corporation and the difficult decisions that have to be made when business leaders start increasing their involvement in public debates. According to a McKinsey survey, "almost half of US executives believe they and their peers should play a leadership role in publicly shaping debate and in efforts to address sociopolitical issues such as education, health care, and foreign policy ... yet only one-seventh of survey respondents consider themselves to be playing that role now". Schultz's efforts to restore economic confidence by taking a step into politics gives us a taste of what might happen when these executives really start doing so. We still have a choice about whether and how those steps should be taken.

Photo by Nick Humphries. Reproduced under Creative Commons Licence.

OSC: Barking up the wrong tree?

This weekend, an interesting business ethics story hit the papers in Canada. It is about the fairly unprecedented measure of the Ontario Securities and Exchange Commission (OSC), on Friday last week, to not only suspend the trade of Sino-Forest (TSX listing: TRE) but to also to demand five of their top executives to step down. Sino-Forest is a Hong-Kong based lumber company mostly operating in China which appeared to have overstated their reserves as well as their revenues. The OSC was alerted to this by a whistleblower in a Canadian investment bank (with the conspicuous name of Muddy Waters...). While the OSC later had to rescind their demand for personnel changes at Sino Forest – it turned out to have no jurisdiction over such far reaching changes in the corporate governance - the case raises some interesting questions about the role and intricacies of business ethics.

For one, it was a pretty unequivocal and drastic measure for a regulator. While the failure of the SEC in the US in the regulation of sub-prime mortgages or the Madoff case has been widely lamented, the OSC seems to be much more hands-on with these things. In some ways, many have argued that this relatively higher level of regulation has in fact strengthened over all the Canadian financial market place.

At the same time the case also raises questions about the role of a regulator. The job of the OSC is basically to ensure a functioning and fair market for capital and credit. The main challenge here is to make sure that the prices signal a credible account of the ‘goods’, and that the information about those goods is available to all players. Issuing commands about the intricacies of corporate governance, including who should do which job, certainly is not the job of the regulator.

In this sense, one could argue that the OSC – while trying to play the tough Sherrif in town – has maybe still some more work to do. Sino-Forest was correctly audited by Ernst & Young and got decent ratings by Standard & Poors and Moody’s (until Friday that is, when both agencies rated Sino-Forest down). It is amazing to see how little attention in the press is paid to these circumstances. How is it possible, that the very intermediaries in charge of making sure the information about a company out there is correct have failed so blatantly and frequently in recent times – with hardly any serious attention to this drawn by regulators? We would certainly recommend the OSC to look a bit closer to these actors.

The incident is also interesting in other respects. One might ask why such an allegedly strong ethical stand of the OSC comes at this point in time? One cannot help but to think about the ongoing plans of a merger between the Toronto Stock Exchange (TSX) and the London one (LSE) – something which is viewed by many Canadian business people as another sell-out of Canada’s business jewels. Arguably, this incident makes a point: the TSX, listing place of around 80% of all mining/resources stocks globally, lists mostly smaller und fairly unknown companies who – unlike big brands or companies with consumer interface – are mostly working under the radar of public scrutiny. Without strong scrutiny from NGOs, consumers or the media, a regulator in such a market has arguably more on its hands. Whether this could easily take place from London after such a merger remains open for discussion

It will also be interesting to watch if such a new approach of the OSC will debunk another Canadian myth: that as a small country in a global economy, regulators have to be soft in order to not shy business away to the US or even further. Currently, Sino-Forest is still traded over the counter in New York. Investors at the TSX though run no risk to buy this ‘junk bond’ any more. In some ways the case seems to provide another confirmation of the thesis that a stricter regulated financial sector has protected Canada and Canadians from many of the hardships the subprime mortgage crisis in the US in 2008 has landed their neighbours with.

Admittedly, this all sounds a bit like we are trying to sneak in another endorsement of the ‘ethics pays’-hypothesis. Well, in this case it might indeed, mostly for shareholders though. But that is a whole other ethical issue in itself.

Picture by jurvetson, reproduced under the Creative Commons Licence.

Crisis? What Crisis?

In the latest edition of ‘Business Ethics’ we referred to the events of 2008 (Lehman, AIG, RBS etc.) as the ‘financial crisis of the late 2000s’. Well, at the time we did not expect this to be useful for the reasons it now makes total (non-)sense: we are quite likely to having witnessed the beginning of the next instalment these days.

Following the budget compromise in the US and the downgrading of US government bonds by Standard & Poors (S&P), we have seen markets plummeting and shareholder’s wealth wiped out in the billions. Again. Rather than being a distinct event from 3 years ago, the ‘financial crisis’ – as it is still commonly referred to – seems more of an ongoing concern than a one-off. This also seems to be the message from Europe: Greece is hardly on the safe side, and new bad news is coming out of Italy, Spain, and even France, of all places!

So let’s put it frankly: there is no such thing as ‘the financial crisis’ or ‘a new financial crisis’. What we see these days is just the new normality in global economics and politics.

What does that mean? We think the last two weeks have given us a little taster of the some major features dominating economic, social and political life for the foreseeable future. First, it was blatantly obvious how the recent turmoil, once again, got induced by the plotting of rating agencies. The initial spark for the fall of stock prices was the downgrading of US bonds by S&P. Now, this is in itself hilarious. As Paul Krugman pointed out, this was not only the company that in 2008 ‘gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise’. As he also reports, the initial downgrading report contained an error of $ 2trillion – and when it was discovered they downgraded those US bonds anyway.

While we do not want to speculate about the motivations of S&P this clearly points to the fact how global political developments are now directly shaped by private, unaccountable corporations. When we started to write about the role of ‘corporations as governments’ in the early 2000s many of our colleagues deemed this ‘an idea whose time has not yet come’. We have much less of a hard time to make this point these days – and we say this not without some regret. It is not only a statement regarding corporations in general. Readers of our text will have noticed that we included a section on the ethics of rating agencies in chapter six of the 3^rd edition in 2010. These players have escaped the scrutiny by both the public and academics alike for all too long.

Parallel to this, the last two weeks surfaced a culmination of public unrest and violence. We got a little appetizer over the summer from Greece, Italy or Spain already. But what happened on the streets of London, Manchester or Birmingham these last two weeks, takes it to a new level. The anger and veracity of violence against persons and property is quite shocking. One of the most thought provoking analyses by many commentators was summarized in an article in Der Spiegel this week. He argues that societies which just had witnessed theft, misappropriation of funds or invasion of privacy by bankers and other corporate players on a massive scale, with next to no consequences for these people, loses its sense for fairness of institutions and trust in the rule of law. 

This is exacerbated by the fact that in all countries affected by the financial crisis the bill, by and large, is footed by cuts in welfare, health and education for middle and lower income segments of society. The latest US budget takes this to an even comical level: tax breaks for private jet owners, but cuts for the sick, old, young, and poor. The fact that the UK is leading in the riot department just reflects that Cameron’s Tories, despite all the smooth talk about the ‘big society’, has not changed a bit from the ‘nasty party’ that they were dubbed under Margret Thatcher in the 1980s.

This wider effect of ‘white collar’ crime has also been re-iterated by the whistleblower Harry Markopolos, who warned the SEC about Bernie Madoff’s Ponzi scheme years before it blew up. In an interview on which the new documentary ‘Chasing Bernie Madoff’ is based he talks about the blatant asymmetry we see between prosecuting million dollar corporate misappropriations and, say petty theft or small time bank robbery. This interview is worth watching also as Markopolos – more a nerdy accountant than an anti-corporate activist – elaborates on the corporate capture of the political system which has for decades refused to adequately police Wall Street. While his is a largely American argument the recent scandal around Rupert Murdoch’s phone hacking scandal has shown that this phenomenon is by no means confined to this side of the Atlantic.

There are little signs of change – which in theory should come from governments and regulators. The haphazard and amateurish handling of the Greek finances by EU leaders, or the dealings and compromises in US politics to fix the budget though provide little hope from this direction. It leaves us all to wonder how the world will develop. What is clear though is that the current situation is not just an ephemeral ditch – a ‘crisis’ - in which the economy is stuck for a short period of time. We should get used to the thought that it is in fact becoming the normal state of affairs.

Artwork by studebaker2008 (top) and takomabibelot (bottom right), reproduced under the Creative Commons licence.