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Intro: "UBS's 'rogue trader' lost $2 billion of his company's own money - it didn't really harm investors. The real story is that the era of big Wall Street profits is over, writes Zachary Karabell."

UBS trader Kweku Adoboli leaves the City of London Magistrates court, 09/16/11. (photo: Getty Images)
UBS trader Kweku Adoboli leaves the City of London Magistrates court, 09/16/11. (photo: Getty Images)

The End of Wall Street's Big Payday

By Zachary Karabell, The Daily Beast

18 September 11


UBS's 'rogue trader' lost $2 billion of his company's own money - it didn't really harm investors. The real story is that the era of big Wall Street profits is over, writes Zachary Karabell.

n September 15, a 31-year old UBS trader in London was arrested for fraudulently attempting to hide "rogue" trades that led to at least $2 billion in losses for the Swiss bank.

The episode was greeted with incredulity. How could a large financial institution, Swiss no less, let its risk controls slip so much that a person in a relatively junior position could lose so much of the bank's capital? But on multiple scores, the reaction misses the point. Risky trading activity is not rare; it is ubiquitous. It is not unprecedented, and in the wake of the financial crisis that is barely three years past, banks are faced with a choice: Take ill-advised risks in a desperate attempt to maintain levels of profit that they have become distressingly accustomed to, or become accustomed to distressingly less profit.

This is hardly the first time a large investment bank has faced massive losses stemming from questionable activities by young, presumably ambitious traders. In 2008, the French bank Société Generale dealt with more than $6 billion in losses stemming from trades made by the young and quiet Jerome Kerviel, and in 1995, twentysomething Nick Leeson infamously brought down the venerable bank Barings Brothers with his ill-calculated trades from Singapore.

Young men taking unwise risks is hardly confined to traders at investment banks, and we shouldn't indulge in deep commentary on why this particular trader did what he did. In the end, the list of reasons is short: The lure of making more money, impressing his bosses or screwing them, impressing his friends/parents/lovers/exes or showing them that he isn't a loser, making one bad trade which in turn begets others and an attempt to cover-up, those are human motivations all too common to merit deep commentary about the industry per se.

But what does merit discussion - and demands recognition - is that the global investment banking industry, concentrated as it is in the old financial centers of Europe and the United States, is in crisis. In many ways, it is a deeper crisis than what it faced after the collapse of Lehman. That was a global crisis that demanded concerted action on the part of governments everywhere to guarantee the solvency of major financial institutions. That crisis allowed the major players - of which UBS is one - to attempt a "return to normal." Yes, risk controls were tightened and the amount of leverage contained, but what didn't change radically were the expectations of the executives who work at these institutions. They were willing (or forced) to take pay cuts in 2008 and 2009, but few have been forced to confront the gap between their expectations of profit and the potential for it in the world today.

A senior member of JPMorgan Chase recently warned profits for the behemoth bank would fall sharply this quarter because of steep declines in trading revenue and even worse trends in investment-banking business. Those issues are industrywide. With the proliferation of electronic trading, the cost of transactions has been plummeting for years, but during the worst of the financial crisis in 2009, very high volumes partly compensated for lower revenue per trade. Now there is even less activity, as individual investors must either sit tight or sit out, and many institutions are following suit. Investment banking meanwhile, which had been one of the major profit centers, suffers from fewer deals at more modest prices, as well as clients no longer willing to pay the same extraordinary fees.

But while the business is rapidly contracting, expectations have not. Wall Street firms still doled out near record bonuses at the beginning of this year. Executives ranging from JPMorgan Chase CEO Jamie Dimon to Barclay's CEO Bob Diamond defended the bonus payouts as a legitimate profit sharing in a lucrative industry that served its clients. That's just the problem, however: There is no way this industry can remain as lucrative as it has been - but there are scores of people who can't accept that.

Global banking is returning to the norm of much of the 20th century, when it was a profitable industry that put capital in motion but nowhere near the scale of the 1990s and the first decade of the 2000s.

In fact, faced with a web of global regulations and very modest yields for fixed-income, muted retail and commercial banking in the US and Europe, low returns for equities and lower trade volumes, as well emerging banking giants in Brazil, China and India are capturing those lucrative markets and engaging in their own capital raising, there is no way that these banks can attain the margins and level of profit that they enjoyed in the late 1990s through the early 2000s. Global banking is returning to the norm of much of the 20th century, when it was a profitable industry that put capital in motion but nowhere near the scale of profitability attained in the 1990s and the first decade of the 2000s.

But no institution fades willingly. Faced with that trend, denial is natural, and so is desperate behavior. Today's UBS trading scandal - which saw $2 billion of UBS capital, not client money per se, evaporate - is a symptom of that. We know this because the unit where it happened was supposed to execute a low-margin, lower-risk trading strategy - but that proved to be unsatisfying to an ambitious young man who surely had in mind bigger things and bigger paydays. More to the point, the bank itself had an internal imperative to find some new avenue of hyper-growth to offset its multiple areas of shrinking profit.

Over the next few years, a few solid winners will emerge in banking land, likely JPMorgan Chase among them. These will be less flashy companies with global reach, multiple channels, disciplined management, and most important, realistic and diminished expectations. But in the process, many other companies will struggle and try to fight against history. They will try to keep alive the flame of abnormal profit and either make or facilitate decisions that serve the illusion that the past few years are just a blip.

This episode at UBS hurt only itself. Let us hope that the next blow-up made by bankers chasing a lost dream is similarly contained. But until the global banking system contracts more than it already has, the risk is not that UBS will earn less than expected this quarter, but that the need to take greater risks to maintain unreasonable levels of profits will lead to a new global crisis. For now, the risks appear most apparent in the sovereign, political arena - Greece, Italy, Europe, and the US budgets. But that may mask the still-unresolved risks of the global financial system, risks born of individuals and institutions harboring ambitions that cannot be attained in the world as it is and yet trying to satisfy those, at all costs. The most likely scenario is that these institutions continue to contract and recede, fading with whimpers and not bangs, but like a country losing influence, they can be dangerous on the way down. your social media marketing partner


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+34 # punk 2011-09-18 11:32
i have no idea what the purpose of wall st is. it seems like they r just middlemen who buy&sell bits of *paper with iou written on them. like selling monopoly deeds. do they have a useful function? i guess they must cuz they make a lot of money and have a lot of status.
*i dont even think u get a piece of paper any more.
+22 # Virginia 2011-09-18 15:11
Wall Street stripped the pension and retirement funds from around the world. See The Sucker Punch on

Most Americans think they've just lost their homes - the hard facts are they've lost their future. All in a securitization Ponzi scheme that neither Congress nor Obama are willing to regulate because America isn't speaking up loud enoungh and these politicians are being fed by the Wall Street Federal Reserve scheme.
+2 # John Locke 2011-09-20 12:25
Virginia, very astute, yes it is a scheme, remember Rothschild comment "as long as i control the money of a nation, i care not who makes its laws..." the reason it is easy to buy a man once in office... or even one with polital ambition... and our government is all set up to accept bribes, its called lobbying, but nonetheless it is a leaglized form of bribary...
+10 # Capn Canard 2011-09-18 17:24
NO! I had an Econ prof who felt that Wall Street served no useful function as wealth itself is dependent on human interaction, i.e. societal group-think. Wall Street produces nothing that has inherent "value". From what I can tell, the value they "produce", such as it is, is largely based on scarcity and has no use, other than the idea of a created illusory value as determined by a transitory speculation, more commonly known as the so-called "Free-Market". If everyone has the commodity in question then the price drops and no one will want to corner that market of said commodity! Hence Gold is always a good bet because there is a limited supply. Oil is used as fuel because there is a limited supply, healthcare is rising in price because far less people have healthcare. And no one is willing to stop that healthcare money making machine! The backers of the GOP is PROFIT HUNGRY. They want more and too much is never enough. It is never ending, if everyone had healthcare, it is possible that the price would fall like a Led Zeppelin! If water were fuel, then the Free-Market would find water to be effectively worthless because water is abundant. Value as determined by the Free-Market is an illusion, and everywhere it is open to potential fraud. It is a game that you are not allowed to play in unless you have millions, or preferably billions of dollars.
+3 # racp 2011-09-19 12:37
Mostly right. The only mistake is that you have reversed the order with healthcare. It will not drop price if everybody has it, everybody will have it if it drops the price (mostly). Health care is not traded on a "free-market" as oil and gold. Those are competitive markets were price follows supply and demand curves. That's why no demand means price = 0. Healthcare providers have monopolistic positions, so will not drop price for any reason.
+1 # John Locke 2011-09-20 12:32
racp, correct... the obama healthcare plan is a windfall for insurance companies, if you look at what he has done since he took office you will be amazed, Nothing for us...but everything for insurance, oil, banks, and large corporations... .the politicians lifeline!
+1 # John Locke 2011-09-20 12:29
There is more to your position... Wall Street controls most sources from oil to gold to copper to you name it, recently Goldman sachs ran the price of oil up by buying some 800 millio barrols of oil on futures speculation, what happened is the price of oil was increased even though the per barrel price actually dropped...its a game and when wall street wind you can bet we are the losers...
+25 # MidwestTom 2011-09-18 12:40
If you believe that Wall Street wages are going to drop, I have a bridge I would like to sell You. Government Sacks and Geithner will see to it that they are not only preserved, but enhanced at our expense.
+27 # jwb110 2011-09-18 12:59
The financial industry is bloated and it was when the American People bailed them out. The biggest mistake was to not let a capitalist system work and let those companies who were failures simply fail.
+9 # Jane Gilgun 2011-09-18 14:26
Good point. A principle of the Tea Party is survival of the fittest and nature red in tooth and claw. According to TP logic, the US government should have let banks fail. In the name of the common good, the government bailed out those responsible for the financial debacle instead of letting them fail. All systems require checks and balances. It's time to check those who have had too much "freedom." Their freedom stops where mine and other people's begin.
+3 # Texas Aggie 2011-09-18 22:49
There actually are a bunch of toilet papers who think that the banks should have been allowed to fail, but these are the same people who believe with a fanatically religious intensity that the government shouldn't have the power to regulate anything. They're kind of caught between a rock and a hard place, but they don't see it.
+1 # racp 2011-09-19 12:32
Aye, Aye! Texas Aggie. The problem was not the bail out, the problem is the lack of change in the regulatory system. I hope those who want the financial system to collapse don't have to see one... more for me than for them.
+4 # Capn Canard 2011-09-18 17:27
jwb110, the GAME IS RIGGED, the TABLE IS TITLED. Wall Street loves competition is theory, but they hate competition in practice.
+2 # RLF 2011-09-19 06:08
Bank failures would have hurt the working class by stealing their savings and pensions. The banks should have been nationalized and then when healthy, sold to the highest bidder. The owners should have lost all of their money.
+24 # Jane Gilgun 2011-09-18 13:11
My future is in the hands of traders on Wall Street and elswhere. I don't see much difference between this young man and many other traders. I wish I had reason to trust these traders. During my working life, I put quite a bit of money into bonds and stock mutual funds to finance me in my old age. The institution I work for has no pension but contributes quite a bit of money to bond and stock funds. So, here I am, at retirement age, wondering whether I will still be poor in old age after almost 30 years of putting all of that money into the market. I will not address those who make more than $250,000 per year and do not pay their fair share of taxes.
+19 # Bob-Investigates 2011-09-18 14:18
Think Oct. 1929, what Wall St. did then, and think the 8 outrageous years of Bush-Cheney. Then, 2008 rolled-around and Bush signed TARP! These are just criminals helping criminals. WE, the Middle-class and Poor, are the victims. The "Tea Party" fools are being manipulated by the FOX-Koch Bros. criminals. Murdock and his son-cronies should spend many years in prison. Will they? Don't hold your breath.
+2 # Capn Canard 2011-09-18 17:28
Wall Street CRIMINALS spend time in jail? NOT GONNA HAPPEN.
+4 # cmcook41 2011-09-18 14:41
I wish I could believe it.
+1 # uglysexy 2011-09-18 18:54
The Greed Heads will land on top no matter what changes are made.....and they will look good doing it.
+2 # propsguy 2011-09-18 20:05
they only call them "rogue" traders when they get caught
+1 # jtom 2011-09-18 21:51
The tea baggers are being used by the big banks and corps. Study ALEC, AFTER YOU GOOGEE it. It will list all of the corporations and the Koch brothers, plus many more. They are writing the laws for the repug. elected officals to help them take all rights from "WE THE PEOPLE". It goes from the Mayors all the way thru the presidential candidates. They had them ready and handed to them before the election. They had already bought them with the supreme court making corps. people.

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