Rogue trader, gambler, fraudster are expressions that often headline stories about Kweku Adoboli, the Ghanaian-born former trader of Swiss banking giant, UBS, who got caught up in the middle of what is described as the largest unauthorised trading loss in British history.
Since Kweku Adoboli’s story broke, the narrative has mostly been narrowed to ‘a former rogue trader who gambled away £1.4bn of UBS money in a huge banking fraud; he was later found guilty on two counts of fraud by abuse of position – a ground upon which he served nearly four of his seven-year sentence.’
Indeed, as an investment trader with UBS, Adoboli admitted his method sidestepped some ethical accounting practices especially hedging trades in order to conceal the fact that he was exceeding his risk limits.
But the missing bits (which regularly get neglected whether on purpose or otherwise) in reports are essential to telling Mr. Adoboli’s story; and helpful in understanding why he acted the way he did while working for UBS.
Adoboli joined UBS’s London office as a graduate trainee in September 2006. As a young intern in a massively growing bank, Adoboli was handed a privileged task of designing a tool to calculate UBS assets globally.
At the end of the internship, his tool calculated UBS’s $3 trillion of assets under management globally and so, he was employed.
After working for just two years as a trading analyst in the bank’s back office, he was promoted to a trading desk; a position one is awarded after attaining some level of trustworthiness. Just after another two years, thus 2008, he became a director of an Exchange-traded Fund desk, and by 2010, he was promoted as a director in UBS.
Adoboli, who was just a little above 30 years, had, within the smallest space of time risen to assume a directorship position in UBS – a world-leading financial company with billions of dollars of assets across the globe.
According to a Financial Times report ‘Adoboli was one of four traders on UBS’s exchange-traded funds desk, which traded on behalf of both clients and the bank. He’d risen from being a summer intern in 2002 to an operations analyst in the back office to a trader on a salary of £33,000 plus a £7,500 bonus in 2005. His salary was later increased to a £110,000 and a £250,000 bonus in 2010, though the reward was never received. During that time, he upgraded from a shared flat near London Fields to a loft in Shoreditch. The bank was also increasingly turning to him to promote UBS.’
The report further stated that; ‘John Hughes, the senior trader on the desk, seemed erratic and less professional, according to witnesses at the trial; it was Adoboli who met with clients and promoted the firm on campus visits’.
The Financial Times further added that: ‘Adoboli believed that as one of the most approachable traders on the desk, colleagues naturally went to him for help. He recalled an instance when a senior manager came to him and said they’d forgotten to book a client trade two weeks earlier and were facing a $1.5m loss. “And he’s like, what can we do, is there anything you can do to fix it? OK, leave it with me, I’ll try to trade around it and make back some of the loss.” A former UBS colleague told me that Adoboli was the go-to guy on the trading floor when there was a screw-up. “We didn’t know how he did it, but we didn’t want to know,” the person said.’
But the commerce that eventually sealed Adoboli’s fate as UK’s biggest rogue trader did not happen overnight and definitely not on the blind side of his superiors.
The system Adoboli operated at UBS evolved through the crisis, desperate to minimise cost and maximize profit at the expenses of human relationship, to such an extent that it became highly risky to trade.
Effectively, Adoboli together with a colleague, with their limited experience, were left to run UBS’ $50bn trading just after most senior and middle managers had left knowing the trouble UBS was going through.
Adoboli, who felt trusted with such a huge amount was determined to salvage the company’s dwindling fortunes.
With just 10 months of experience on UBS’ trading book, Adoboli’s plight was even worsened by the 2007-2009 global financial crisis that wreaked havoc in financial markets across the globe, collapsing Lehman Brothers (one of the biggest investment banks in the world).
UBS, which was hit with a $60bn loss in the subprime market, was also going through an existential crisis with most of its senior managers, the veteran banking superstars, who built the bank It had become resigning.
According to Kweku, “They saw the tsunami that was coming, they saw the crushed bonuses, the volatile markets, so they left.”
Meanwhile, the effect of the 2007-2009 global financial crisis that completely dislocated the market and its telling impact on UBS cannot be sidelined in narrating Kweku’s story.
All these challenges (thus a dislocated and volatile market, global financial crisis, UBS existential crisis) culminated to daily loses of millions of dollars for UBS as well as Adoboli’s ETF desk.
Adoboli, who often mastered the courage, approached his senior managers to lodge complaints about the challenges they are facing, was often turned away, and eventually, his team stopped asking and tried to develop their own system.
Together with his team, Adoboli created an internal slush fund he calls the ‘umbrella’, which is to store, skimmed profits that he and others could later sprinkle back in to cover daily losses.
Not without violating some legal accounting procedure Adoboli’s Umbrella was a success and UBS had survived the crisis.
Interestingly, the umbrella itself was an evolution of another accounting practice where basically if there is $5 million dollar loss or profit, accountants were instructed to suspend the profit and loss in a suspense account until such a time they want it released.
The bank survived the crisis, and Adoboli and his team are now recognised and celebrated veterans of UBS.
UBS created this new group called global synthetic equities, which was meant to be a driving source of profits for the equities business and Adoboli’s desk was going to be the central driver of profit for global synthetic equities.
With $900,000,000 of profit per year target, the ETF desk was supposed to drive most of that. As a result, the desk became a proprietary trader i.e. basically taking a risk with the bank’s money to generate profit for the bank; and Adoboli’s team still used the umbrella because it had become a central part of their accepted practice and their bosses knew.
By June of 2011, that is 6 months into the year, and his now 4-member team who worked close to 18 hours daily, generated $135 million dollars of profit and they were obviously going to miss a $900m annual target.
In a mid-year review meeting, the ETF team had their profit target for the year increased by 50 per cent.
Not only did Adoboli and his team have to replicate what they had already done in the six months before, with only four hours sleep a night every night for six months. Now they had to do even more for the following six months. And of course, what you do is you take more risk.
According to Adoboli: “I remember a conversation with my supervisor going, it’s too much pressure because it was destroying my family life. It was taking too much. Didn’t have the energy to call my friends. I didn’t have the energy to pick up the phone when my mom called me. It was too much pressure and I said so, but all I got back was, don’t worry, you will be okay. Don’t worry about it, man. We’ve done this before”, he said.
The problem is ETF desk was making our money from proprietary decisions for the bank which meant they had to read the highly unpredictable market, try and figure out what it was going to do next and make a call on what would happen next. Everyone has to agree what the market’s going to do next.
But 2011 pretty much started with the Greek debt crisis, then there was the Japanese earthquake with the tsunami, then there was the US debt-ceiling debacle; all this was unfavourable for the market hence highly risky to trade. Adoboli sent an uncountable number of emails saying, “I think the market’s going to crash and if it crashes, we’re not going to be ready for it,” but unfortunately that view didn’t align with the house view of the bank.
The problem, of course, is that investment banks tend to only make money in stable and rising markets because otherwise, clients don’t trade. There’s no activity in a frightened market.
Contrary to Adoboli’s firm warning, the research team of UBS sent a note, 147-page research document to UBS clients saying that the market was going to be stable to rising.
Eventually, Adoboli got taken outside by one of his my senior traders, and he said to him, “look quick, you’re on your own. You know, you can’t trade as if the market’s going to fall if you’re on your own. Because if it doesn’t, you’ll be disowned.”
Adoboli increasingly came under a lot of pressure from his seniors, who eventually came and said, “look, the market’s going to rally. You can’t keep telling our clients it’s not.”
“So, on July the first 2011, I said in a text and I wrote in a WhatsApp message in an instant messenger message to my colleagues. All right, fine. If everyone thinks I’m wrong, then I must be wrong. I’ll just go along with everyone else.” Adoboli said.
But July 2011, the market started to sell off. It didn’t stop selling off for the next six weeks and in that time some of the markets that we had positions in sold off 35 percent as Adoboli had originally predicted.
According to Adoboli, “The problem is that: we’d lost resilience. We were tired, we weren’t sleeping, we had a ton of conflict between us and ultimately that conflict told we lost our sharpness. We lost our ability to make rational decisions. we lost our ability to understand the morality behind what we’re choosing to do and in a desperate bid to recoup the growing losses. We chased the market as it went lower and lower. I used the word we advisedly. I wasn’t on my own. Everyone around me knew what we were doing.”
The ETF desk had made so much loss and the team was scared to make it known to their senior traders.
According to Adoboli, “There were kind of two choices. We either try and buy more time, which would involve sending emails, mischaracterising the trades to those people outside our circle who didn’t really understand it, or we go forward together. We make it public. This is our loss and let go of it and say it’s your problem. You deal with it. We’ve had enough. We could have done that too, but the desk didn’t want to do that, so I eventually, after an hour of going around the circle with the desk said, look, guys, I can’t carry on. I think we need to end it because the repercussions are growing, so if you guys aren’t willing to go forward, I’m going to send an email taking responsibility for it. Since so many people know what’s going on, I’ll get fired and you will be allowed to carry on the desk and rebuild it after the loss is crystallised and of course, as you can imagine, the guys on the desks were like, really? You do that?”
Adoboli sent the email and that’s when the justice process kicked in, which is what seems to have sealed Adoboli’s fate – a mistake to take responsibility of a teams loss.
Adoboli sent the email and sealed his fate as a rogue trader, his colleagues were exempted from the legal tussle even after he told the whole story, his truth.