UBS Trading Loss Was $2.3 Billion; Gruebel Stays as Chief

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UBS Bonuses at Risk After $2.3 Billion Trading Loss
UBS said on Sept. 15 it may be unprofitable in the third quarter after the loss at its securities unit. Photographer: Chris Ratcliffe/Bloomberg

UBS AG, Switzerland’s biggest bank, announced that its loss from unauthorized trading amounted to $2.3 billion, more than initially reported, while Chief Executive Officer Oswald Gruebel said he will stay on.

The loss, first estimated on Sept. 15 at $2 billion, came from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, the Zurich-based bank said in a statement yesterday. UBS made the latest disclosures two days after London police charged a 31-year-old trader with fraud and false accounting.

“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” UBS said in the statement. The magnitude of the risk was masked by “fictitious positions,” it said.

Gruebel, 67, who joined UBS out of retirement in 2009 after record losses during the financial crisis led to a government rescue, told Swiss newspaper Der Sonntag that he doesn’t plan to resign because of the loss. His comments were confirmed by spokesman Serge Steiner. In a separate interview, he told Swiss TV that he is ultimately responsible and will have to “take the consequences.” Gruebel, whose career in finance spans half a century, is a former trader who also led UBS’s biggest Swiss rival, Credit Suisse Group AG.

‘The Sword’

“It shows that in the end even a guy like Gruebel who knows a lot about investment banking cannot avoid a catastrophe,” said Tobias Straumann, a financial historian at the University of Zurich who was commissioned by UBS to conduct a probe into its internal controls during the subprime crisis. He found the management “complacent” and criticized it for relying too much on internally produced risk management reports.

Questions remain over whether investment-banking chief Carsten Kengeter or other senior executives will be pushed out following the loss.

“The sword will have to go up the food chain,” Jason Kennedy, chief executive officer of Kennedy Group, a London-based search firm, said in a phone interview.

While the bank said the trading losses occurred over the past three months, London police charged UBS trader Kweku Adoboli with false accounting offenses dating to October 2008, and fraud dating back to January 2009, according to the court charge sheet.

Adoboli didn’t enter a plea, and his law firm, London-based Kingsley Napley, declined to comment.

Unprofitable in Quarter

The trader, whom UBS didn’t identify by name, “revealed his unauthorized activity” following “inquiries directed at him by UBS control functions that were reviewing his positions,” the bank said. UBS has covered the risk from the trading and its equities business is operating normally again within risk limits, the bank said.

UBS notified the police and regulators of the unauthorized trades early in the morning of Sept. 15. Adoboli was arrested at 3:30 a.m. and remains in police custody. He is being held until Sept. 22, when he can request bail at a court hearing.

The bank said on Sept. 15 it may be unprofitable in the third quarter after the unauthorized trading at its securities unit. The loss, less than two months after Gruebel said the bank had “one of the best” risk-management units in the industry, exposed flaws in its controls.

Britain’s Financial Services Authority and its Swiss counterpart said they would investigate the trading losses. Deloitte LLP will carry out the probe on behalf of the FSA and the Swiss regulator, the Sunday Telegraph reported yesterday, without saying where it got the information.

‘Controls Failure’

“This is a controls failure,” said Francois Chaulet, who helps manage 250 million euros ($345 million) at Montsegur Finance in Paris. “How are you going to explain to your shareholders and employees that you’ve lost this amount from the acts of a single young employee in a trading room.”

UBS rose 0.9 percent to 10.35 francs by 1:55 p.m. in Swiss trading. The shares dropped 11 percent to 9.75 francs on the day the bank announced the loss, the biggest decline since March 2009, before rebounding by 5.2 percent on Sept. 16.

Gruebel told staff in a memo yesterday that he was “shocked and disappointed” by the unauthorized trading, describing the events as a setback to UBS’s reputation and its effort to build up capital. He said the loss won’t affect UBS’s capital base, and the risk of someone violating the bank’s controls “always exists.”

‘Buck Stops’

“I and the rest of the firm’s management are fully focused on thoroughly investigating this issue, and will do all it takes to determine how this happened and what we need to do to ensure that it does not recur,” Gruebel said in the memo. “Ultimately, the buck stops with me.”

David Sidwell, the senior independent director on UBS’s board and a former chief financial officer of Morgan Stanley, will lead a three-person committee investigating the trading loss and the bank’s controls, UBS said.

The two other people on the investigative committee are board members Ann Godbehere and Joseph Yam. Godbehere was CFO of Northern Rock Plc until 2009, and held the same position at Swiss Reinsurance Co. from 2003 to 2007. Yam is the former head of the Hong Kong Monetary Authority.

The trading loss may hurt the bank’s credit rating, Moody’s Investors Service said today in its Weekly Credit Outlook.

“This development points to ongoing weaknesses in UBS’s risk management and controls and is credit negative for the bank,” the report said. “If management is unable to increase investment banking revenue while appropriately containing risk, it will further set back profitability with negative effects on the bank’s credit quality.”

Jobs ‘Under Scrutiny’

UBS had to raise more than $46 billion in capital from investors, including the Swiss state, to make up for the record losses during the credit crisis. The bank’s tier 1 capital at the end of the second quarter was 37.39 billion francs ($42.3 billion), giving it a tier 1 capital ratio of 18.1 percent.

The investment-banking unit had pretax earnings of 1.21 billion francs in the first half of 2011, while UBS as a whole had net income of 2.82 billion francs in the period.

UBS said last month it will eliminate about 3,500 jobs, with about 45 percent of the reductions coming from the investment bank, as stricter capital requirements and market turmoil hurt the earnings outlook. The bank in July scrapped the target of doubling pretax profit from last year’s level to 15 billion francs by 2014.

Appeasing Shareholders

Gruebel and Kengeter, 44, have been trying to revive earnings at the investment bank for two years. They hired more than 1,700 people across the division and brought in new business heads to replace those that left or were fired. They’ve also increased risk-taking.

The measures brought limited benefits. UBS’s share among the nine biggest investment banks of revenue from trading stocks and bonds and advising clients on capital-market transactions and mergers more than doubled from 2009 through the first half of this year, yet it remained the lowest.

UBS was aiming for annual savings of 2 billion francs by the end of 2013 through the latest job cuts. More reductions are likely following the trading loss, analysts and recruiters said.

“If you are looking to appease shareholder expectations that means finding other ways to improve earnings, such as cutting costs,” said Jon Nicholson, a managing director in London at recruiting consultant Astbury Marsden. “The bonus pool will be affected and people’s jobs will be under scrutiny.”

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