This UBS “rogue trader” story is pretty amusing, especially because nobody properly explains what constitutes “unauthorized trading.” The implication is that trades that lose money are unauthorized. I think there’s not much more to it than that. And the fact that this didn’t come to light until the trader informed UBS of the “unauthorized trades” (i.e. “Hey boss, I just lost a bunch of money”) shows the continued lack of institutional control. Deliberate lack, even. Matt Yglesias gets this right:

These rogue traders are out there because their bosses don’t want to know what they’re doing. I never get a “rogue burrito” at Chipotle because the management wants people to get burritos that are rolled properly. But suppose the management wants people to obtain the kind of high returns that can only be achieved through unduly risky trades. Well, you can’t very well issue a directive telling people to make unduly risky trades. You certainly can, however, create circumstances under which incentives, control, and supervision are structured so as to make it the case that “rogue traders” will pop up here and there and then there (sic) rogueishness can be blamed ex post for undertakings that go badly.

This is just another example of how the banking industry remains in the state of crisis, because three years after the collapse of Lehman, the biggest banks have only gotten bigger, the regulation remains as piddling as ever, and the banks themselves are disinterested at best in proper risk management. We haven’t gotten over the effects of the first financial crisis, because the first crisis never ended.

The basic point to understand about the financial crisis is that it isn’t in fact over. The liquidity crisis of 2008-2009 was temporarily abated, but the solvency problem hasn’t been dealt with. The global financial architecture is essentially dominated by too many obligations, a.k.a. debt, that cannot be paid. This can only be addressed by a mass writedown of debts. Usually creditors don’t like being told they can’t have the money they think they have and force is required. Debtor deals are often preceded by civil wars, world wars, or depressions. But not always — sometimes a debtor cartel can force writedowns. So that’s the solvency issue […]

This could have been fixed. But it hasn’t been, because of an overall failure of financial-friendly economists. I’ll quote Alice Rivlin, in a “let them eat cake” moment in 2008 on the foreclosure wave that triggered the crisis.

“We should not forget that a lot of good came from the housing boom. Millions of people moved into new or better housing. Most of them (including most sub-prime borrowers) are living in those houses and making their mortgage payments on time.”

Many people are frustrated that the response to the crisis hasn’t been stronger. But it was always obvious that the goal of the crisis measures was to get the financial elites back to ordinary business as quickly as possible. In that context, the most reasonable question in the world is, why wouldn’t Lehman happen again? We don’t have a persuasive answer to that question. And until we do, we’re still in crisis.

There are losses in the system, losses from a years-long inflation of the housing bubble, that banks do not want to take. And so the risks, in search of high rewards, continue unabated. And the regulators do nothing.

David Dayen

David Dayen