Ian Dyson, commander of the London police, speaks to the media after the… (Simon Dawson / Bloomberg )
LONDON — Swiss banking giant UBS said Thursday that a rogue trader has caused it an estimated loss of $2 billion, stunning a beleaguered banking industry that has proven vulnerable to unauthorized trades.
Police in London said they arrested a 31-year-old UBS trader, Kweku Adoboli, in the alleged fraud. UBS declined to confirm his name.
Switzerland's largest bank warned that it could report a loss for the entire third quarter as a result of the rogue trade.
The case evoked memories of the $1.3 billion loss by Nick Leeson in 1995 that caused the collapse of Barings Investment Bank, and Jerome Kerviel, the trader who caused the French Societe Generale bank a $6.7-billion loss in 2008. The scale of that loss rocked the global financial industry and prompted banks to tighten oversight rules to ensure such large sums couldn't be traded unnoticed.
Venetia Thompson, author of "Gross Misconduct," a book about her life as a City of London trader, told the BBC that despite more rigorous controls "our appetite for risk hasn't gone away and it was only a matter of time before we saw something like this again."
"It is cyclical," said Simon Bevan, a fraud and financial crime investigator, told the BBC. "We see [such incidents] about every seven years or so."
"Back-office controls get tightened … but in reality it is about human beings and their appetite for risk, and traders do tend to be alpha males and they will act in a certain way often encouraged by the bonus structure," Bevan said.
UBS provided little specific information, saying the incident was still under investigation and no client money was involved. The unauthorized transactions could cost UBS almost as much as the $2.28 billion the bank hopes to save by cutting 3,500 jobs over the next two years.
It comes as UBS is struggling to restore its reputation after heavy subprime losses during the financial crisis that resulted in a government bailout, and an embarrassing U.S. tax evasion case that blew a hole in Switzerland's storied tradition of banking secrecy.
Peter Thorne, a London-based equities analyst at Helvea, said the loss was financially manageable for UBS. But he said it was a blow to the reputation of UBS and its management, and will likely add to calls for the bank to slim down its investment banking unit.
According to his profile on professional networking site LinkedIn, Adoboli worked on an equities desk at UBS called Delta One — the same supposedly low risk operation that Kerviel was involved in when he lost $6.7 billion.
In his Delta One role, Adoboli traded in Exchange Traded Funds, which track an underlying asset such as a stock exchange, a sector, or a commodity like gold. They are cheaper than traditional mutual funds, and have given retail investors the chance to get involved in products to which they might not have previously had easy access.
ETFs have grown massively over the past few years and are thought to be worth over a trillion dollars. Some critics argue that many of the markets that the ETFs are indexed to are too small to absorb this amount of money and that's pushed up bad, as well as, good assets, as well as exacerbated boom-bust cycles.
The LinkedIn page showed that Adoboli spent the past five years working at UBS's European Equity Trading division after three years as a trade support analyst for the bank.
He graduated from the University of Nottingham in 2003 with a degree in E-commerce and digital business, the university said.
Times staff writer Janet Stobart contributed to this report from London.