Institute for Simplicity

Consulting Based on the Principles of Simplicity

Out of Control: UBS Investmentbanker Adoboli causes loss of more than 2 Billion Franks

Artikel vom 23.09.2011

Most of authors who write about this case, mention greed as the major problem which leads young bankers to excessive deception. Nick Leeson caused Barings Bank to collapse. Jerome Kerviel caused Société Général to lose 5 Billion Euros.  Obviously, bonuses lead to these desasters. Other comments also mention that Riskmanagementsystems did not work well – expecially at UBS.

We are convinced that the reasons for these catastrophes are not “number-oriented young bankers acting as ticking bombs” (Hamburger Abendblatt) or inefficient Computer-Riskmanagementsystems. The real causes are the traditional and stupid systems how banks work. Mainly two: Missing personal controls of the bosses of these investmentbankers (face to face, detailed and profound) as well as obscene bonussystems which allow some employees to earn more than their Top Management. In 2010 alone, UBS paid bonuses of a total value of 4,3 Billion Swiss Franks. The bank´s dividend to their shareholders was 7,2 Billion Franks (Handelsblatt, 22.9.2011).

The solution we suggest is: good salary without any bonus and good control by the direct supervisors.

Of course, Riskmanagementsystems are necessary and make sense. Hugo Bänziger, Executive of Deutsche Bank and responsible for Riskmanagement, mentioned in an interview with Das Handelsblatt how the bank is going to expand their Riskcenter in Berlin. At a final stage, some 700 employees will work there. Bänziger expects that this will help to reduce the risk down to almost zero.

We all hope that the Black Swan will not visit Deutsche Bank one day. Too easily we all rely on these systems and ignore the risk (“almost zero”).

Poor management will keep black swans flying close to banks. Apparently intelligent riskmanagementsystems will not stop the black swans unless manager start controlling their employees and stop dangerous bonus and incentive schemes.

We already emphasized important management methods in order to avoid such catastrophes in our Coachingletters (Control, No. 17 and Bonus, No. 11). We obviously have to continue writing about it.