Rogue trading is back in the news. In September, UBS was all over the media after one of the Swiss Bank's traders racked up a $2.3 billion loss. So who are the worst rogue traders in banking history and what has unauthorized trading really cost the banks? (For more, check out Top 4 Mistakes That Cause Futures Traders To Fail.)

TUTORIAL: Investing 101

Societe Generale
Societe Generale revealed in January 2008 that a rogue trader had lost the bank $7.1 billion. The fraud virtually wiped out the 2007 profits at France's second-largest bank and sent shockwaves through European markets, which were already struggling in the economic climate.The rogue trader was Jérôme Kerviel, then 31 years old. A court case suggested that Kerviel had been betting $50 billion of the bank's money on the trades. However, Kerviel claimed that the bank had turned a blind eye to his activity when his trades were turning a profit. The bank bosses suggested Kerviel had lost so much because he was adept at hiding his losses and bypassing checks, which he would certainly have needed to be, to rack up this scale of loss.

The impact at Societe Generale was huge. This fraud led to serious changes in the bank's senior management and several 100 million euros of investment in new control systems, designed to prevent future rogue traders from wrecking the business.

Barings Bank
Nick Leeson, arguably the most famous rogue trader in history, brought down one of the grandest names in British banking. When his crime was finally discovered in 1995, bosses found that losses amounted to more than 800 million pounds, equivalent to $1.3 billion, almost the entire assets of the bank. Working in Barings' Singapore office, Leeson was a star of the bank, initially making large profits by dealing in derivatives and futures. However, after running up losses, he began hiding his bad trades in a single account. As the losses grew, so did Leeson's desperation. He made a series of unsuccessful and increasingly risky attempts to make the money back. (To help you understand the risk of trading, read Operational Risk: A Must-Know For Investors.)

When the scale of the losses materialized, Barings, the U.K.'s oldest merchant bank, crashed and was bought for 1 pound by the Dutch banking and insurance group ING. Dozens of executives who were implicated in the failure to control Leeson, resigned or were sacked. Leeson himself criticized the practices that allowed him to gamble with such large amounts of money in his autobiography, aptly named "Rogue Trader."

The Swiss Bank has recently hit the press after a trader, Kweku Adoboli, had lost them $2.3 billion through rogue trading. On the face of it, the recent UBS case appears to bear remarkable similarities with the rogue trading scandal uncovered at Societe Generale. Both Kerviel and Adoboli had previously worked in the investment banking back office, getting insider knowledge that allowed them to run unauthorized trades that ended up costing the bank millions. At UBS, none of the bank's wealthy private clients suffered losses as a result of this fraud, but only time will tell what damage this will do to the bank's reputation. After all, UBS was hit badly in the credit crunch and required a bailout from the Swiss taxpayer.

The Bottom Line
As the most recent case at UBS has highlighted, the fact that trades can go on for so long, undetected, illustrates the risks in the financial system. Scrutiny within banks and businesses needs to be expert. If banks and regulators knew how to stop the rogue trading, they presumably would have done it already, although I am sure that other banks will currently be double-checking their own trading desks. Scrutinizing banks' back office and risk control functions even more closely is the obvious answer to preventing rogue traders. However, history suggests that UBS's recent debacle is unlikely to be the last we see. (For more on the history of wall street, read Wall Street History: Panics, Scandals And Rogue Traders (Oh My!))

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