By Sarah Morgan
UBS’s announcement today that an employee in its investment bank lost $2 billion generated plenty of headlines and outrage from regulators. But beyond the titillating details of another Wall Street trader allegedly gone wild, does the story mean much for the average investor?
Probably not. The market’s reaction to the scandal was a swift and immediate hit to shares of the Swiss bank, which dropped about 11%, even as American and European stocks indexes rose. But even for UBS shareholders, the damage may be limited. The actual loss to UBS, while big for most businesses, isn’t much for a well-capitalized bank like this one, says Erin Davis, an equity analyst with Morningstar. In other words, this shouldn’t do lasting damage to the company – or its shares.
But outside of Wall Street, most people aren’t affiliated with the bank at all. They don’t own shares, and they aren’t clients or customers. To them, the trading scandal is simply a juicy Wall Street incident with little impact on their portfolios or financial decisions. Some savvy investors may even see a chance to snap up shares of the bank on the cheap. After all, UBS is one of the few large European banks with little exposure to the sovereign debt crisis there.
So why is it getting so much attention? A $2 billion loss from what the bank described as unauthorized trades by 31-year-old Kweku Adoboli is certainly big enough to raise eyebrows. (Not the biggest, though: Last year, Societe Generale trader Jérôme Kerviel was found guilty of making unauthorized trades that resulted in $6.5 billion in losses at the French bank.) But for many market watchers it’s not just the size that counts: These trading scandals raise questions about the less-than-perfect controls and risk management operations at major financial institutions, as well as lax oversight by industry regulators.
And while these stories capture a lot of media attention, they often steal the spotlight from even bigger problems in the financial system, says Karl Mills, the president of Jurika, Mills & Keifer. “The biggest rogue trades are things like the housing bubble, which was a rogue trade that everybody was participating in,” he says. “The big rogue trade is actually this systemic debt issue in Europe and the fact that our economies are built on this fiction that bad debts are good.”