Why a rogue Trader does not get caught.

Readers must be aware of the rogue trader in UBS, UK who landed up with a $2 billion loss. That is almost 10,000 crores Indian Rupees. I have been reading a lot of blog posts on this issue and three points emerge:

1. It is not easy to lose $2 billion. The exposure required to lose $2 billion must have been quite large.

2. Banks are much less intelligent than the impression they give. Bankers behave as if they know the world (and control it). But, the reality is otherwise. Where were the control systems of UBS? How could such a loss emerge? I read that the trader informed management about this loss, meaning that the control mechanisms had failed to detect it on their own.

3. Rogue traders emerge because managemnt allows them to do so.While these traders are making money for the company, the management turns a blind eye to their risky ventures. It is only when the trader blows up that management begins to cry aloud. In fact, in all fairness, instead of the trader, it is a different set of people who should be in jail.

Who are these traders? “young, smart with a burning desire to move ahead”. Well, this reads like a recipe for disaster, sooner or later. A trader should, by definition, be conservative.