What causes big banks like UBS, which have sophisticated risk management systems, to be hit by rogue traders who can cause billions of dollars in losses? Aaron Brown is a well-regarded risk manager at AQR, a $37 billion hedge fund in Greenwich, Conn. He previously worked as a risk manager for Citigroup, JP Morgan, and Morgan Stanley. Before that he was a professor of finance at Fordham and Yeshiva universities. The author of the recently published book “Red-Blooded Risk: The Secret History of Wall Street,” Brown recently spoke with Institutional Investor contributing writer Charles Wallace. Institutional Investor: We’ve had two recent examples of lone traders managing to run up huge losses for their banks. At UBS this summer, 31-year-old Kweku Adoboli, a trader at the investment bank in London, lost $2.3 billion. In January 2008, Jerome Kurviel, a trader at Société Générale in Paris lost $6.7 billion for his bank. Normally, what sorts of safeguards do banks have in place to prevent these kinds of losses from happening? First of all, you’ve got an immediate supervisor who should be seeing his trades and know what he is doing and how he makes his money. Then there is an internal audit that is reconciling everything. There is an operations department that is clearing all the trades and there are risks managers who are looking at the total exposure and how that relates to actual price and cash movements. In a perfect world, all of those people would have seen what the traders were....

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