UBS, the Swiss-based financial services company that is the world’s second largest manager of private wealth assets, has been in the news a lot lately. We all know about the rogue trader,Kweku Adoboli, who cost UBS a cool $2.3 billion, prompting major questions and concerns about their risk management/controls process and ultimately leading to the resignation of their CEO. Unfortunately, this is not the first time that UBS has been on our radar– here are details on how UBS was fined by FINRA for misleading retail investors about the risks of Principal-Protection Notes and fined by the SEC for fraudulently rigging municipal bond reinvestment transactions in 36 states.

This insightful article by James Stewart in the New York Times takes a deeper look into the prevailing culture of UBS and finds that the rogue trader may have been quite at home. Stewart notes that the unauthorized trading was “only the latest in a series of egregious ethical and legal lapses at UBS that have badly damaged the bank’s once-sterling reputation.” One salient example was the charge brought by the New York State Attorney General Andrew Cuomo that UBS misled customers when it sold them what it described as nearly risk-free auction-rate securities even as its executives knew that liquidity in these securities had vanished. UBS was forced to repay investors $19.4 billion and pay a $150 million fine. Just as the large US banks received an injection of government money via TARP and other mechanisms, UBS was bailed out by the Swiss government after absorbing $38 billion of losses in the real estate collapse of 2008. While the music was playing, all the UBS traders were competing to see who could show the biggest gains in the now toxic collateralized debt obligations. A loss of this magnitude makes Kweku Abodoli look like a piker, indeed.

Given the large financial responsibility he had in the cutthroat environment of UBS’s Delta One trading desk, it is not difficult to understand how Abodoli could have gone so far astray. Playing in a high stakes zero sum game can elicit depraved behavior from even the most well-intentioned people. Unfortunately however, these are not the sort of people attracted to this line of work. A study from the University of St. Gallen summarized here by Spiegel found that professional traders behave more recklessly and are more manipulative than psychopaths. That is almost incomprehensible, but it certainly does line up with the finding that the physiological process that occurs in traders’ brains while trading is similar to what they experience when taking a cocaine hit. It also helps us understand the behavior of a miscreant like Fabrice Tourre (“The Fabulous Fab”) of Goldman Sachs who was so proud of himself for dumping crappy investments on widows and orphans.

To summarize, we should not be surprised by the occasional appearance of a Kweku Abodoli or a Jerome Kerviel (the rogue trader who cost Societe Generale 4.9 billion Euros).  We should only wonder why we don’t see more of them.