Following last week’s arrest of rogue trader Kweku Adoboli, Swiss bank UBS has probably had as much fun in investment banking as its wealthy clients can stand.
Adoboli was accused of fraud after incurring a potential $2.3 billion loss for the bank. A UBS spokesman won’t say how it happened, but the problem appears to relate to unhedged dealing losses, disguised by fake trades.
The situation would be bad enough, even as a one-off. But, in recent years, UBS has suffered too many setbacks for comfort.
The worst, of course, was a gigantic punt in US credit instruments of questionable quality, leading to a $50 billion write off in 2009. Swiss taxpayers were forced to support the bank and Oswald Grübel was hired as chief executive to steady the ship.
Further back, in 2007, UBS closed its Dillon Read Capital Management hedge fund business, led by its former bond star John Costas, after it incurred losses of $150 million. Dillon Read had been created in 2005, sucking seasoned bond players out of UBS at the peak of the credit boom, when it most needed them. Costas quit after DRCM shuttered and former chief executive Peter Wuffli followed him out of the door.
If you go back to 2000, you find UBS buying a staid US wealth adviser called Paine Webber, which took a while to respond to treatment. It bought UK wealth manager Laing & Cruickshank, only to see its key players walk out of the door a few later. Ditto, Scott Goodman Harris.
In 1998, UBS suffered a $700 million loss as the biggest shareholder in stricken hedge fund giant LTCM. The year before that, it suffered losses of $640 million from derivatives trades, including those incurred at a division led by Ramy Goldstein, a former Israeli paratrooper, who left UBS soon after. UBS was forced into a shotgun marriage with its bitter rival Swiss Banking Corporation, and former chief executive Mathis Cabiallavetta was told to go.
Perhaps all this was bad luck. But it is hard to avoid concluding that top management at UBS has struggled to keep up with the challenges of running a modern investment bank, which relies on fast computers, tough compliance, quick decisions, complex arbitrage strategies and traders with an average age of 30 to make profits.
Traders are like sprinters out to forge a profit out of fleeting market opportunities. By comparison, UBS wealth advisers are marathon-runners, seeking to generate trust over the long term. Straddling the two styles was always going to be a challenge.
UBS’ hierarchical management of its investment bank contrasts poorly with chief executives like Bob Diamond (Barclays Capital); Brady Dougan (Credit Suisse) Lloyd Blankfein (Goldman Sachs); Jamie Dimon (JP Morgan), and Anshu Jain (Deutsche), renowned for their attention to detail. They may have struggled in the credit crisis, but they came out of it on the front foot.
In contrast, UBS’ 2010 decision to go for growth at its investment bank risk exposure has been viewed as optimistic: the division suffered a plunge in its profitability at the 2011 halfway stage. Further back, the bank contrived to be one of the more active players in the credit market at the peak of the boom. A damaging dispute between UBS wealth management and the US tax authorities in 2008 over alleged client tax evasion was allowed to drag on way too long.
UBS has, of course, enjoyed success on several fronts. Wealth has seen a turnaround since 2009 and Bob McCann is making a good fist of running its US wealth arm: banking group Wells Fargo is supposed to be sufficiently impressed to want to buy the business. John Fraser also deserves respect for boosting the fortunes of its asset management division. Both men work hard to get the respect of their troops, and get to hear of potential problems in time to deal with them.
But all this good work has been obscured by problems at UBS investment bank, leveraged by criticism in the global media. To preserve its reputation, and the trust of its clients, UBS needs to get shot of its trading business, if not its entire investment bank, without delay.
And if top management fails to act swiftly, this time round, the Swiss government will need to make the decision for it.