It Takes Real Skill to Lose $2 Billion

By L. Randall Wray

Sometimes you come across a story that really warms the cockles of your heart. I am talking, of course, about the report on UBS’s star trader, Kweku M. Adoboli who lost $2 billion. He is only 31 years old. Now, what had you accomplished by the time you were 31? Mr. Adoboli had risen through the ranks to the point that he was entrusted with a trading account that let him accumulate a loss of $2 billion. Imagine this guy’s potential! Limitless opportunities await him on Wall Street—at least, once he gets out of prison. And he could open a “think tank” like Michael Milken, devoted to proving that his trades might possibly have made good if only the world had cooperated.

Mr. Adoboli presumably tired of the sure thing. According to reports, he was supposed to be working in exchange traded funds, matching buyers and sellers in a high volume, low risk market where risks are easily hedged. That is sort of like the investment bank equivalent of a Jimmy Stewart thrift. Obviously, no one wants to do that kind of business—earning spread money. And so investment banks have created an infinite number of schemes to dupe sellers and buyers, trading for their own account while betting against clients.

But that’s the sure thing. Mr. Adoboli instead—according to various reports—tried to take advantage of price differentials between traded index securities and underlying stocks, and avoided hedging risk.

It’s hard to lose money in investment banking, but if you are really, really clever you can find a way to do it.

I hope he gets his bonuses this year. Initiative deserves reward. After all, the big banks continued to pay stupendous bonuses when the financial crisis hit, rewarding traders and CEOs for record losses. The argument, of course, was that in a time of such distress, no bank could afford to lose such highly skilled help. Where would they find replacements able to dream up losing propositions?

Now, UBS will need to keep Mr. Adoboli on retainer or they’ll lose him to a competitor looking for a star with potential to lose big bucks. After a stint punching out license plates, he’ll rise to the top of some investment bank. I’ll put my money on him—as the next Bob Rubin, Lloyd Blankfein, Dick Fuld, John Thain, Hank Paulson or Joe Cassano, all richly rewarded for driving their institutions into the ground.

No one remembers the CEOs or traders who actually make money for their shareholders. Name one. That’s what I thought, you can’t. Because it’s child’s play. We remember the Nick Leesons, the guys with real vision and willingness to take risk, and ability to run up losses.

Even John Paulson got tired of the easy, sure thing. He’s now on a fantastic losing streak. He’s down 40% this year. Yes, I know he made $5 billion last year betting on gold. But gold is a fool’s bet. Look, when Dallas hedge fund manager J. Kyle Bass dupes the University of Texas into buying a billion dollars in gold bars, you know gold has become the sucker’s bet. Poor Paulson does not realize he is on the client side of a Vampire Blood Sucking Squid trade this time!

After all, investment banks only lose the money of clients and shareholders. Who cares? Wall Street is just a crap shoot, with other people’s money—heads Wall Street wins and tails everyone else loses. Why all the fuss?

Think about it this way. Let us say you go to Las Vegas to lose $2 billion (maybe you are the treasurer for a pension fund) and start feeding the slot machines as quickly as you can. The problem, of course, is that you are going to win occasionally—so you’ve got to get those coins back into the slots. Your goal is to lose, say, $1000 per day. Maybe you’ve got to put $1850 on average per day into the one-armed bandits to average a loss at that daily rate. It’s going to take you about 5500 years to lose $2 billion. That shows you the long odds that Mr. Adoboli was up against—he’s only 31 and he’s already lost his first $2 billion.

That folks, is skill.  

In related news you cannot miss three similarly heart-warming stories.

1. In a new book to come out this week by Ron Susskind (Confidence Men: Wall Street, Washington, and The Education of A President) we’ll see how Timmy Geithner saved the world from a rookie President Obama who ordered the Treasury to develop a plan to shut down the biggest banksters. Fortunately, Geithner thought better of that, so instead he worked with the Fed to provide a $29 trillion dollar rescue package to keep the banksters in business. If he had actually listened to his president, who knows whether Mr. Adoboli would have been able to lose those billions. 

2. Former Senator Bob Graham urged President Obama to reopen and investigation into the Bush Administration’s rescue of Saudis in the aftermath of 9-11. You see, most of the terrorists involved were Saudis and they almost certainly had help from rich and prominent Saudis living in the US. Fearing a backlash, investigation, and possible prosecution they asked President Bush to make a wee little exception to the grounding of all aircraft. Bush launched a fleet of jets to rescue them. All this had been exposed long ago by Michael Moore, but new information sheds lights on close connections between particular terrorists and rescued Saudis. Since the Bushes and the Bin Ladens are close family friends (even closer than the Bass brothers), all stops were pulled to sweep them out of the country. You’ve got to love the loyalty.