- Who gives $2 billion to a 31-year-old trader?
- Who was supposed to be supervising him?
- Was he just the fall guy for the bank's impending announcement of a quarterly loss?
- Didn't the bank learn anything from the 2008 scandal at Societe Generale when Jerome Kerviel was accused and convicted of causing $6.8 billion in losses?
- Isn't it strange that errant white Ivy League American traders have not been targeted the same way as Raj Rajaratnam, Adoboli and Kerviel? One is Hindi, another is black and the third is -- OMG -- French!
But this begs another question, at least for me. Is this real money or is it a sort of Ponzi scheme or other scheme in which the numbers are exaggerated? Surely, there are other traders at UBS and the total amount for which they are responsible is far more than $2 billion. Think of it this way. Top executive pay is in the tens and tens of millions. The CEO of one pharmaceutical had a total compensation package of about $1 billion. Now extrapolate among many other CEOs, retirement funds, trust funds, etc. Remember, of course, that pension funds have dwindled over the years and not everyone puts in the maximum amount in his 401(k) plans. Finally, UBS is hardly the only bank to handle billions of dollars. In addition to other banks there are hedge funds and other funds.
The funny thing about hedge funds is that the term has become a catch-all phrase for managed funds. When Madoff first came into the picture at Fairfield Greenwich Group, I asked Walter Noel's daughter, Corina Piedrahita, what the newly created fund, Fairfield Sentry, actually was. "It's a hedge fund." What were they hedging, I wondered? Her response was that it's just a conservative fund and when the stock market rose dramatically, it would only go up a little, about 1 percent a month. When the market dropped, even a lot, Fairfield Sentry would go down a bit or stay the same, something that made them proud. To me, hedging was about not committing oneself one way or the other, in order to make sure that whatever happens, you probably won't lose. In personal life, one hedges one's bets about a job (when jobs were more readily available), that an item you wanted would still be there the next day (or you could go elsewhere), etc. With investments, hedging was a form of more calculated risks and there was something in place to offset possible losses. Even the simplest form of investments carries risk. That interest rates won't rise during the term of a CD, that a company's earnings will rise, that the buzz about a new release of medication, electronic, whatever will be in demand. The most conservative, risk-adverse investors have some diversity, such as CDs at multiple banks or small investments with various companies.
Which boils down to the questions of what kinds of investments do UBS, et. al. handle, and are their traders just gamblers? It's one thing if an investor or group of investors are willing to lose everything. If, however, they are responsible for other people's money, such as retirement funds, then they have a responsibility to keep that money intact. About a decade ago I invested money in Chase Manhattan Bank, before JP Morgan was involved. I lost money on that investment because at the time I invested, Chase had made loans to Enron. No one, of course, had done any due diligence because Ken Lay and Jeffrey Skilling convinced the world that Enron was innovative with its mark to market and other "creative" accounting practices, all rubber stamped by the once reputable Arthur Anderson and Company. I had no clue to whom the bank was lending money, let alone what the terms were. We all know what happened with Enron. I never directly invested in Enron, but I lost money anyway. That was so not fair, but it was part of a risk I took by investing my money -- and mine alone -- in Chase.
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