Friday, September 16, 2011

ETFs. Liquid and low risk unless you work for UBS

Useless Bank of Switzerland © fintag

News comments:
Nick Leeson.

Not a particularly smart guy. But he did outsmart the smart and brought down Barings all those years ago. He started trading naked to cover his losses. Premium collecting mostly. So now we hear UBS had their own Leeson with the not-quite-rolling-off-the-tongue name of Kweku Adoboli. He went to a mid tier university and did a degree in eCommerce. So not your Ivy League sort then.

One of his bosses went to Harvard and worked for the Fed (see yesterdays fintag) but he seemed more interested in collecting titles and enhancing his resume than ensuring there was adequate risk management.

Adoboli wasn't hedging his ETF book apparently and started to trade naked. Was it an FX hedge that went the wrong way? Or was it him syphoning off a few dollars? All will be revealed in due course. Like a poker player he went for more and more and failed to recognise the probability of not gaining back his losses. A classic trading error but then he had only been trading a couple of years. Where was his team leader? The grand sounding Delta One division he worked in came out of O'Connor one the best derivatives houses ever. The smart people left and the not so smart with degrees in Telephone Management and Body Art took over and here we are today.

One of the problems was in the product he traded - ETFs. Exchange Trade Funds. They are listed so are nice and liquid and retail houses love them. The EU loves them. Regulators too. The pension funds of regulators and politicians are full of ETFs. Problem is most are swaps on underlyings. They are just bits of paper that correlate to something else. How many Gold ETFs actually own the physicals? They are an illusion. Some are saying ETFs are the next SubPrime. Personally I think Sovereign Debt is the next SubPrime but regulators are just not able to do anything about both because they are conflicted. Regulators are run by the State so Sovereign Debt is a no go. ETFs are what Regulators love to bits as it ticks all the right boxes for retail investors.

However, nobody lost anything except it appears UBS. They are a bank and everyone hates banks. UBS is a dysfunctional bank. I have friends who have worked there in senior positions and they say its like working for the civil service with big pay packets. It has that Swiss attention to detail but in the wrong areas (Swiss based Tremont was very anal re DD and yet invested mostly in Madoff). They love mancos and excos and meetings and carrying around hardbacked exercise books and of course powerpoint. Its systems are legacy and they spend a lot money on blackbox programming (which IT people hate doing) and security and the rest is cobbled together off the shelf and bespoke apps. It is a mess but keeps many people employed.

UBS was a great private bank. It should have stuck to that. Rumours are UBS (The Swiss government) will be selling their Investment Bank soon and maybe this Leeson episode will pre-empt it.

Who do we blame? The Europeans love the blame culture. The ETFs or the Bank? Both is the answer.

Today's shorts:
ETF providers (Blackrock) fight back (ifa)

ETFs are as safe as Greek Debt (etftrends)

UBS people exposed (ftalphaville)

Today's longs:
Silver ETFs are top performing bits of paper(msn)

Fintag to launch new ETF called the iFraud UBS tracking trust.


Anonymous said...

Interesting writeup at rolling stone - Focus on legislative changes in US.