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ivan

I think the key sentence of your blog post is: "From the information at hand it looks like a long running lack of governance."
That a single "rogue" agent could single handedly dig a hole $3.2Bn deep within 3 years sounds odd. Didn't he had a boss? peers? an auditing counterparty? didn't his boss have a boss? This event speaks about an awful lack of risk controls at UBS and I am not convinced that isn't a conscious institutional decision. Are there any other "rogue" agents that generated big profits with equally risky and uncontrolled trades? Where they fired? sued? ... not likely.
Is it possible to prevent a single trader from inflicting a multi-billon dollar loss and at the same time not prevent him from producing a multi-billon dollar gain? how? Are UBS and the entire industry's incentives aligned towards that goal? ... not likely

gunnar

@Ivan - All good points. One part I blogged about last week is that ETFs are accounted for differently in Europe

http://1raindrop.typepad.com/1_raindrop/2011/09/dangers-of-safety-mechanisms.html

So the systems weren't integrated and the ETF part of the hedge (downside protection) was fiction and not uncovered.

Derivatives are a dangerous business, the leverage means that even a small trading desk could expose a company to a lot of risk. One might expect to see additional controls around derivative exposure to manage the additional risk that comes through leverage (side note - the eu is currently looking to use leverage as part of the Greek bailout - what could possiby go wrong there?).

One of my favorite derivatives quotes from Warren Buffett:

"Long ago, Mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats."

This speaks to the issues around managing derivative risk exposure, but then this should be factored in before taking on the leverage and opening the positions.

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