UBS trader arrested

LONDON – One man armed with only a computer terminal humbled a venerable banking institution yet again. This time it was Swiss powerhouse UBS, which said Thursday that it had lost roughly $2 billion because of a renegade trader.

The arrest of 31-year-old equities trader Kweku Adoboli in London is one more headache for troubled international banks, and fresh proof that they remain vulnerable to untracked trading that can produce mind-boggling losses.

Adoboli would join a rogue’s gallery that includes Jerome Kerviel, who gambled away $6.7 billion at a French bank until he was caught three years ago, and Nick Leeson, who made so many unauthorized trades that it caused the collapse of a British bank in 1995.

The scale of those frauds rocked world finance. Banks tightened oversight rules to make sure such large sums could not be traded under the radar. But the safeguards, designed to protect the public and shareholders alike, seem to have failed.

UBS discovered irregularities in its trading records Wednesday night, and Adoboli was arrested early Thursday. Swiss banking regulators began looking into the scandal, which sent the bank’s stock sharply lower.

“From the scale of this case, you can be sure that it’s the biggest we’ve ever seen for a Swiss bank,” Tobias Lux, a spokesman for Swiss regulators, told the Associated Press.

Analysts said the bank’s image would be badly hurt. UBS was deemed to have recovered from the lending crisis that hammered banks in 2008 and to have improved its management of risk, said Fionna Swaffield, a bank analyst at RBC Capital Markets.

“This obviously brings this very much into question,” she said.

Details about the alleged fraud were scarce. In a terse statement shortly before markets opened, UBS informed investors that a large loss due to “unauthorized trading” had been discovered.

The bank estimated the loss at $2 billion, big enough that the bank said it might have to report a quarterly loss.

In a letter to employees, the bank said it regretted that the incident came at a difficult time: “While the news is distressing, it will not change the fundamental strength of our firm.”

Adoboli was being held by London police. There was no word on whether he had retained a lawyer.

According to his profile on LinkedIn, a social networking site for professionals, Adoboli served on an equities desk at UBS called Delta One and worked with exchange-traded funds, which track different types of stocks or commodities, like gold. It is the same type of work Kerviel did for his bank.

UBS said the trading was under investigation and no client money was involved.

Peter Thorne, a London equities analyst at Helvea, said the loss was manageable for UBS but a blow to its reputation and management. He said it would probably add to calls for UBS to cut back its investment banking unit.

Banking industry observers immediately highlighted similarities to the Kerviel case, which also involved a young trader entrusted with vast sums of money.

Kerviel, who traded at Societe Generale, France’s second-largest bank, was convicted in October 2010 of covering up bets worth almost $68 billion in all, with losses of $6.7 billion.

He was ordered to pay the bank back all the money he had lost and was banned for life from the financial industry. Kerviel has appealed the verdict.

Leeson lost $1.38 billion, or about $2 billion in today’s dollars, betting on Asian futures markets for Barings bank until he was discovered in 1995. The bank, which had been in business for more than 230 years, collapsed.

By coincidence, the Swiss parliament began a long-slated debate on the future of the country’s banking industry Thursday.

Lawmakers are being asked to consider proposals to assure that Switzerland’s two biggest banks, UBS and Credit Suisse Group, are brought under tighter control. Some lawmakers want the banks split up to make sure they are not “too big to fail” – so massive that they would wreak enormous damage on the economy if they went under.