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Rogue trade

September 15, 2011

Swiss bank UBS says unauthorized trading by an employee has cost the bank an estimated $2 billion. Police in London have arrested a man in connection with the case, which could see UBS to post a third-quarter loss.

UBS sign and cloudy sky
The rogue trading could mean a third-quarter loss for UBSImage: picture-alliance/ dpa

Switzerland's biggest bank, UBS, says unauthorized trading by an employee at its investment banking unit has led to an estimated loss of US$2 billion (1.45 billion euros).

The bank announced the loss in a brief statement just before the stock market opened on Thursday.

"It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected," the statement said.

Police in London arrested a 31-year-old man early this morning in connection with the allegations.

UBS spokeman Yves Kaufmann declined to identify the trader involved and said the matter subject to investigation.

Aerial photo of Tower Bridge, the City financial district of London
Police arrested a man in London early on ThursdayImage: picture-alliance/dpa

Significant setback

The discovery is another blow the banking behemoth, which has been trying to regain client confidence after it had to be rescued by the Swiss government in 2008, when UBS suffered massive losses due to toxic assets held by its investment arm.

Just last month, UBS announced it would slash 3,500 jobs to save $2.3 billion in annual costs as it prepares for possible lean times ahead. Investment banks around the globe have suffered from slow trading due to investor wariness in the light of the European debt crisis and the United States' continuing economic woes.

Risk management

UBS shares tumbled some 8 percent as the markets opened Thursday before recovering somewhat mid-morning. According to ZKB trading analyst Claude Zehnder, the case is harmful to the bank's reputation.

"It is amazing that this is still possible," he told Reuters, adding that UBS "obviously has a problem with risk management."

"With this, they are losing a lot of credit that they had regained with effort," Zehnder added.

Jerome Kerviel and police
Jerome Kerviel was sentenced to jail last year for rogue trading at Societe GeneraleImage: AP

Going rogue

UBS isn't the first bank to be hit by a massive loss allegedly caused by a single rogue operator. There have been several high-profile incidents of unauthorized trading that cost banks millions or billions over the past decade.

One of the most notorious cases was that of Jerome Kerviel, a young trader at France's Societe Generale. In 2008 the bank discovered that his unauthorized trades had lost the bank 4.9 billion euros ($6.7 billion).

Kerviel was found guilty of breach of trust and forgery in October 2010, and was sentenced to five years in jail with two years suspended. He was also ordered to reimburse the bank.

In April 2010, MF Global employee Evan Dooley was indicted on fraud and other charges after racking up $141 million in losses generated by speculation on wheat futures contracts in 2008. The incident was only disclosed in December 2009 after US regulators slapped a fined on MF Global for lax supervision.

Author: Kyle James (Reuters, AFP)
Editor: Sam Edmonds