Swiss banks are often called the most stable and well managed banks in the world, catering to wealthy clientele and backed by the almighty Swiss franc. This week, however, UBS (UBS: Charts, News, Offers) – the largest Swiss bank – made a shocking announcement that a rogue trader engaging in unauthorized trading had cost the bank $2 billion USD. The appalling loss and lack of security led shares to immediately plunge over 11% during Thursday trading. The rogue trades, allegedly executed by London UBS employee Kweku Adoboli – a director of exchange traded funds (ETFs), are set to cause a third quarter loss for the struggling bank, which has fought hard to regain credibility in the wake of the global financial crises of 2008-2009 and the European sovereign debt crises of 2010-2011. The wealth management arm of the bank was once the largest in the world, but has since slipped to third place.
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Adoboli’s trades at UBS call to mind the recent memory of Jerome Kerviel in 2008, who caused a loss of $6.7 billion at Societe Generale, where he worked on Delta 1 products – derivatives which closely track underlying securities and help investors gain easy access to multiple asset classes. Adoboli also worked on and exploited the Delta 1 systems to use a high frequency exchange of equities, futures, forwards and exchange-traded funds.
Prior to the revelation, UBS had been implementing a $2 billion franc ($2.29 billion USD) cost-cutting measure to lay off 3,500 employees. This program’s benefits have now been canceled out by the $2 billion loss, which may mean that additional jobs will have to be eliminated along with the 3,500 slated for termination. UBS currently employs approximately 18,000 throughout Europe and the United States. The bank currently operates over 900 business and banking locations worldwide – with 43% in Switzerland, 41% in the Americas and 11% in the rest of Europe, the Middle East and Africa, and 5% in Asia.
While UBS has stated that no client positions have been affected by the rogue trades, and all accounts were guaranteed, the fiasco is a major PR nightmare for UBS, which has been slowly recovering from a devastating tax evasion scandal in 2009-2010, in which the bank helped wealthy American clients dodge taxes. UBS management has a spotty history of failed pledges to fix its risk systems, which led to massive losses on toxic assets in 2008-2009. Those debt problems led to the stock dropping from the low $60s in 2008 to under $8 by March 2009. UBS is expected to unveil a major restructuring plan to investors on November 17. Swiss financial markets regulator FINMA has been informed of the rogue trades and is currently assisting the bank.
UBS CEO Oswald Gruebel and investment bank boss Carsten Kengeter, both former traders, have been accused by investors of taking an overly aggressive stance to boost its bond business through the hiring of hundreds of traders – like Adoboli – to make high risk trades. Three years ago the bank was nearly destroyed by the U.S. subprime crisis and its aftershocks. Analysts believe that UBS, which was saved during the financial crisis by a state bailout, has not learned its lesson in risk management, and now investors are paying dearly for this lack of oversight. “They obviously have a problem with risk management,” stated ZKB trading analyst Claude Zehnder, “Even when the amount isn’t so high it is once more a loss of confidence that casts UBS in a poor light.” Many believe that Gruebel, who headed the bank throughout the years of crisis, will step down, transferring most of the blame for the current debacle to Kengeter. To make matters worse for UBS, the Swiss government is currently attempting to pass tougher capital rules to insure that financial institutions can weather future financial storms without government aid.
For the rest of the year, UBS is expected to book a restructuring charge of 550 million francs, with 450 million francs booked in the second half of fiscal 2011 and the majority of the impact being dealt to third quarter results. For now, things certainly look dire for UBS, which has managed to damage its microeconomic forecast in the eye of the European macroeconomic storm.
Other News About UBS
Suspected rogue trader held at UBS
After a (very) short manhunt, UBS holds its suspect – but now what?
A rogue trader at UBS or a rogue bank?
Is Adoboli simply the tip of the iceberg of a rogue institution?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
This makes me so angry – people are unemployed – housing their homes and we have some yahoo losing 2 billion dollars – think of what that money could do for the disadvantaged of our country/world