Rich On Money

Kweku Adoboli took UBS for $2 billion in trading losses

Banks are Dumbest Guys in Town

The banking industry today is not the banking industry you grew up with. In the old world they took deposits and lent out money, pocketing the difference which criminals call the veg. Today they believe they are investment banks and brokerage firms because Glass Steagall which separated banks and investment banks in the 1930’s was repealed by the Republicans in the late 1990’s at the behest of the banking industry.

In my opinion and experience, banks should not be allowed to be investment banks or proprietary traders. Bank management teams are among the least capable of any management group I have ever encountered. Banks simply do not know how to manage brokerage risk, never have, and never will. I have seen this all my life and there are no exceptions.

I watched Prudential Insurance take over Bache and & Co. – the result Prudential Securities blows up, and gets sold. UBS takes over Paine Webber – the result proprietary trading blows up UBS with $2 billion loss. General Electric perhaps the best managed company in the world takes over Kidder Peabody. I warned the management team at GE be careful. Their retort was we are the masters of risk containment. Oh really, a year later GE takes a multibillion dollar loss and then blows out Kidder Peabody. 

Over and over again I have watched banks take over brokerage firms and investment banks, and always with the same result. Pain on top of pain as the banks recorded losses for transactions they did not understand, and now here we are again a $2 billion hit for another bank. They will probably write it off as extraordinary to avoid a massive hit to the income statement. Why you ask, because that’s what banks do. 

Only once in several decades did I think I was wrong with my general thesis that banks can’t manage Wall Street type risk and that was during Sandy Weill’s reign at Citigroup. He bought brokerage firm after brokerage firm, probably 15,000 brokers when he was done. He bought Salomon Brothers the bond house in addition to other trading firms. I was wrong for a couple of years and then it all unraveled. It could not be managed, and Citigroup fell apart. The stock virtually collapsed down to $2 a share and required a major bailout by American tax payers through the TARP Program. 

Now we come full circle again, as we watch UBS reveals that management was asleep at the switch while a trader lost billions. No risk containment whatsoever as General Electric would say. These guys have hundreds of internal auditors and nobody was watching as to who was driving the bus. It will happen again and again. We are not through with banks losing billions because they do not understand Wall Street risk. As investors you had better be careful where you keep your money.