The chances are that if your ISA is invested in shares your using some kind of synthetic product that’s to say you’re not investing in shares but in a series of complex financial products constructed underwritten and sold by a banker like Kweku Adoboli who formed part of UBS‘ Delta One group and lost his employer a cool £1,200,000,000.00 or thereabout (looks good when you add in the noughts!).
Now you might ask what is wrong in just giving your money to a sensible fund manager who invests your contributions in shares of the companies you are investing in. Well apparently this is inefficient, the banks have worked out that they don’t need to physically invest but can just take bets around the outcomes of other people’s investments.
Now as we all know, if you bet £5 to win £100 with a bookmaker you are taking a price of 20-1 and if you are the bookie you are putting at risk twenty times the money you are likely to make on the bet. The bookies have enough money in their satchels to cover the bet, you had enough money in your wallet to make the bet.
UBS has enough money to cover the rogue trades and we shouldn’t forget that the £1.2bn they’ve lost has been won by others.
The banks don’t like to hear their investment arms being called casinos but it’s difficult to call them anything else. The biggest issue for me is why we need these clever clog derivative contracts, these structured products and all the risk they bring. What is the upside to the consumer? Do these efficiencies cited by the bank from dealing not with “physicals” but “synthetics” end up benefiting you or me? Or are they just a way of keeping investment bankers in the lifestyle to which they’ve become accustomed?
We the public have of course got the right to boycott these products and I suspect that if most people were told what was inside the tracker funds, tracker mortgages, guaranteed accumulation funds, fixed rate mortgages , they would be very concerned indeed, concerned enough to question the purchasing decision.
Of course the banks aren’t going to put the kind of disclaimers that are meaningful within these products.
Warning; this tracker uses complex derivatives about which we know something but not very much. If all these contracts went wrong together there is a real chance we would go bust and have to go back to your Government for some more money. The chances are that you’d bail yourself out but you might fancy looking at more straightforward alternatives (which we don’t sell as they don’t make us much money)
Now that really would be worth reading
- UBS rogue trader: You were warned about ETFs, says Terry Smith (telegraph.co.uk)
- ‘Rogue trader’ losses engulf UBS (telegraph.co.uk)
- How To Get The Greenlight To Put $2 Billion Of Your Employer’s Money At Risk (UBS) (articles.businessinsider.com)
- A rogue trader at UBS or a rogue bank? (blogs.ft.com)
- Something for the ETF lobby to chew on (ftalphaville.ft.com)
- Tom Stevenson: ETFs have potential to become the next toxic scandal (telegraph.co.uk)
- UBS Trader Gets No Miracle as Delta-One Loss Leads to Arrest (businessweek.com)
- The argument for ringfencing just gained another boost (thebankwatch.com)
- DealBook: Arrest of UBS Trader Rattles Banks in Europe (dealbook.nytimes.com)
- Inside the UBS rogue trade and the man accused of it (business.financialpost.com)
- UBS: Rogue Trader Hit Firm (online.wsj.com)
- UBS bankers face zero bonuses (theglobeandmail.com)
- Rogue trader’s father: my son ‘acted with good intentions’ (telegraph.co.uk)