Inside the world of business

Slow learners at UBS

ONE OF the most startling things about the arrest of UBS trader Kweku Adoboli (31) in connection with a $2 billion fraud, is how little has changed three years after the sub-prime crisis that brought global banks, including UBS, to their knees.

Adoboli operated in the Swiss Bank’s “Delta One” business, a shadowy area of banking which has also been identified as a major engine of growth for investment banks. As one commentator noted most bank chief executives don’t understand how these units work and UBS’s admission that it doesn’t know where the rogue trades were made, and it may be some time before it can do so, seems to confirm that assertion.

Delta One products are derivatives that are designed so that for a given percentage move in the price of the underlying assets there will be an almost identical move in the price of the derivative. In finance speak they have a delta of one.

Much of the activity revolves around Exchange Traded Funds (ETF), which are vehicles that allow investors track a diverse group of assets without the downside of paying high fees. Because the ETFs are quoted on stock exchanges, Dublin has become a major centre for them, it seems like they are a pretty safe bet. But increasingly ETFs contain a much more exotic mix of derivatives rather than the plain vanilla mix of commodities and cash equities that they started out as.

Blurring things even more, the investment banks are not entirely open about how they manage, hedge and rebalance these funds. As a result they blur the lines between proprietary and client trading.

All of which is horribly familiar from the days of the synthetic collateralized debt obligations, made up of dodgy US home loans, which blew up so spectacularly in 2008.

UBS lost €50 billion in the sub-prime fiasco, which forced it to accept a bailout from the Swiss government. Clearly the top brass haven’t learned their lesson.

Trapped by a tracker mortgage

WITH ALL the talk of mortgage debt forgiveness, the problem of restoring the property market to a functioning state has taken a back seat. And it is easy to see why this is the case: the situation faced by those burdened with unrealistic housing debt is considerably more nightmarish and urgent than that of people who quite fancy a bit more space or even those who want to get on the ladder for the first time. But to discount these latter two groups would be mistaken with both needed in a healthy market.

The issue of poor or even non-availability of mortgages will be familiar to anybody who has entertained the notion of borrowing lately. And even when a loan is proffered, the interest rate may be enough to scare off the would-be borrower, who is probably used (in the case of a trader-upper) to the security delivered by an existing tracker mortgage.

This represents the nub of the problem – how can those holding such mortgages (which are no longer available) be persuaded to give them up so that they can move house, thus vacating properties for first-timers?

The issue requires a creative response, both from the banks and the Government.

From the lenders’ perspective, it’s a particular toughie, because trackers mean losses, rather than profits, so it makes sense to get rid of as many as possible from their books. This is no mean feat, given some lenders see two-thirds of their total mortgage exposure tied up in such products.

Perhaps the approach should not be one of eliminating trackers, but rather about tolerating them with a view to winning more lucrative business from an existing customer base. This could see, for example, a trader-upper, being allowed to move their tracker with them when they buy a new property (to a point at least) but being required to finance the additional expense attached to the purchase via a new mortgage product. Any subsequent early or over-payments would then be taken off the tracker, rather than the newer portion of the loan. This way, the lender would make some money out of the deal, while the buyer wouldn’t feel like the risk is quite so large.

Meddling in the market is of course aways potentially problematic, but this may be justified, if managed properly.

You can get the latest news each business day at irishtimes.com/business or by following us on Twitter at twitter.com/IrishTimesBiz. We also have a Facebook page at facebook.com/IrishTimesBiz where you can read the latest business headlines, blog posts and reader polls.