Consequences of the UBS Scandal

Today news broke that a trader at the large Swiss banking firm UBS defrauded the bank of two billion dollars by making unauthorized trades.  Although news of this situation is just breaking, the implications it could have on world financial markets are serious.

Much of the world is currently faced with uncertain economic times.  Rogue traders like the one recently discovered at UBS do not help matters.  Confidence is already low in the world economy and can only be made worse by this recent event.  Upon the news of the situation coming to light, UBS stock fell eight percent.  The last thing that the stock market needs is more instability brought about by the actions of one single criminal.

Perhaps the most important question that should be asked here is how was this one man was able to cause UBS to lose two billion dollars.  While he was apparently “a director in European equity trading,” he certainly had a boss.  Whoever was his supervisor should certainly share in his subordinate’s responsibility.  One would expect that when someone is given such a position of responsibility, as the rogue trader was here, that they will not abuse it.  One would also suspect that when billions of dollars are at stake, no single person would be able to get away with defrauding a bank of two billion dollars.  Here, apparently someone was able to do this.  In the wake of this disaster, it is highly likely that UBS will change its policies on supervision of traders.  Other banks should certainly follow suit or risk their own embarrassment.

How the rogue trader (and perhaps his supervisor) should be punished can also provide some food for thought.  While the trader will certainly be subject to criminal prosecution, this will never truly atone for the monetary loss and additional instability in world markets caused by his actions.  While no punishment may suffice, hopefully the bad publicity UBS is getting will cause banks across the world to make certain something like this can never happen again.

The fact that UBS is a Swiss bank also holds some significance.  Swiss banks have been viewed as some of the safest, most secure banks in the world.  While UBS insists that no client positions were affected, the situation still serves to create doubt in the security of the Swiss banking system.  When people begin to doubt the security of long-standing bastions of impenetrability, it can only serve to create chaos in an already volatile market.

While this disaster is just breaking, it will be interesting to see in the days and weeks ahead what the consequences to the world economy this debacle will have.  How should the rogue trader and perhaps his supervisor(s) be punished, and what steps should other financial institutions take to make sure this doesn’t happen again?  It will be interesting to see how these questions will be answered in the weeks and months ahead.

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