The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass 2

Here are the beginning and ending paragraphs of Matt Taibbi’s story, The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass.

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.

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.

I have read a few headlines on the “rogue trader” story, and figured that it was a story I could safely ignore. Now this wake-up call of a story is giving me second thoughts.

Some of the reader comments on the story are scarier than the story itself.  Here is the comment from a poster named Matt Dubuque:

Matt, I USED TO BE A MARKET MAKER IN DERIVATIVES>>> Please contact me at

THE REAL SCANDAL behind this story is “synthetic ETFS” which are going to be the next big thing to blow up on our faces after the “synthetic CDOs” blew up.

Tens of millions of Americans have invested in exchange traded funds (ETFs) WHICH THEY THINK represent purchase of baskets of securities to track a given economic trend such as the price of gold or technology stocks.


But now with “synthetic” ETFs, traders like this fellow are NOT investing in gold futures or tech indices. FAR FROM IT.

WHAT THEY are doing is investing in “proxy” indicators for those indicators in the form of NAKED credit default swaps (oh no, not AGAIN), whose CORRELATION to the underlying asset is CHOCK FULL of stupid assumptions.

CDOs based on subprime mortgages were clearly harmful to the financial system; what made that whole experience CATASTROPHIC was when “synthetic” CDOs exploded on to the scene and into the value of our mortgages.

Same thing with synthetic ETFs, which is what this guy was trading in.

This is just the first tiny explosion.

For some corroboration of what Matt Taibbi and Matt Dubuque wrote, I found the UK Guardian story UBS, the big bank that can’t stay out of trouble, shakes the City again.

It was the investment bank that plunged UBS into multibillion-pound losses during the credit crunch because of its exposure to toxic US sub-prime mortgages and related derivatives. Today, the same unit is at the centre of an inquiry on opaque exchange traded funds (ETFs). These complex financial products allow speculators to bet on price rises or falls in a vast range of indices, currencies and commodities, from the FTSE 100 to gold and even “leveraged live cattle”, without having to buy shares or commodities directly themselves.

Commentators said it was remarkable that the scandal had been uncovered in the same week as the publication of the Vickers report on UK banking reform, which proposes that banks’ high street operations should be ringfenced from riskier “casino” investment banking. “It could have been written with UBS in mind,” says one analyst.

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2 thoughts on “The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass

  • SteveG Post author

    Yes, I should have been more skeptical about Frank-Dodd. Unless we really close these people down by reinstating the Glass-Steagall act, they will just go from one scam to the next with the regulators not even close on their heels.

    I have been skeptical enough about ETF’s since they were first announced so that I have never bought one.

    As the CDO incident before demonstrated, refusing to buy the fraudulent investment is no guarantee that you will avoid the pain of the collapse.

  • MardyS

    Wow, ….indicators for those indicators… ! Yikes!

    Is this a second or fourth derivative? What a way to almost win big then crash bigger!