ETFs, the UBS debacle and other concealed and impending disasters

The case of the UBS employee who hid some $2billion in losses from 2008 has been hitting the headlines for the last few days while I have been travelling.

Some analyses suggest that the financial instrument at the centre of the fraud, Exchange Traded Funds (ETFs) started "simple and transparent" and that was fine, but the problems commenced when ETFs became "complicated and obscure".

While there is some truth to such analyses, they miss the essential point that anything that starts without any underlying "real assets" is very quickly, by that very fact, going to move into "complicated and obscure" territory.

Where there are underlying stocks, bonds, commoditiees or at least alternative assets, those assets will keep the instrument, to a certain extent, from becoming too "complicated and obscure", though of course even real assets cannot prevent such a development entirely as seen by the way in which mortgage-backed securities developed. However, in the absence of any tangible backing, even that little constraint is absent.

The worrying thing about the UBS case is this: the "rogue trading" existed from 2008 and it has only just come to light, so how many other such fraud cases exist in banking? When will they come to light?

And we must be clear that such frauds are not merely "failures" on the part of an individual manager or institution, such frauds are endemic to investment banking because of the huge time-lag between deals and the issuance of the relevant documentation.

Indeed, investment banking is based to a very large extent on trust, and that trust-environment was created by Protestantism in the West. With the decline of Biblical belief, investment banking is by its very nature more and more exposed to such fraud. In boom times, any fraud that might exist can be easily covered up, but such frauds emerge sooner or later in times when the economy, as currently designed, is going through one of its predictably-frequent recessions. Sphere: Related Content