UBS: After Wuffli, What?

The Swiss financial giant suddenly ousted its well-respected CEO, which could cause unease. But he's being replaced by powerful talent

Zurich-based financial giant UBS (UBS) has a disconcerting habit of dispensing with senior managers without warning. Luqman Arnold was shoved out as chief executive officer in December, 2001, and replaced by Peter Wuffli in circumstances shrouded with mystery. Now, Wuffli has lost out in a boardroom coup.

In the early hours of July 6, UBS surprised just about everyone by announcing that the group chief executive would "relinquish all of his functions at UBS and leave the bank." Wuffli will be replaced by Marcel Rohner, the deputy CEO and chief of UBS's most valuable business, private banking (or Global Wealth Management, as it is officially known).

The clumsily handled shift may indicate that the bank is under strain as it tries to maintain its position at the top tables of world financial institutions with the likes of Goldman Sachs (GS) and Morgan Stanley (MS). While UBS has been one of the great success stories in finance in recent years, it is coping with issues such as how to prevent the poaching of top traders by hedge funds.

Creating unease

What's more, as a bank that earns its biggest riches from wealth management, UBS is struggling over whether to hazard unsettling its clients by taking the sort of trading risks that have been so successful for Goldman. UBS, like other foreign banks that have made U.S. acquisitions, also is challenged by managing a large U.S. business that includes the former Paine Webber brokerage firm.

It is not clear, though, whether ousting Wuffli is the answer to any of these questions. The former McKinsey consultant is well-respected inside and outside UBS for the job he has done in forging a collection of acquired institutions into a coherent force (see, 07/25/05, "The Master of Zurich"). His abrupt departure is bound to create unease inside the bank and raise questions about the bank's future direction.

Assuming that there are no time bombs lurking on UBS's books, what could ease any damage is that Rohner and Raoul Weill, 47, who will succeed Rohner as head of Global Wealth Management and Business Banking, are both rated savvy, relatively youthful financiers in the Wuffli mold. "Strategically, there will be little change," said analysts from Keefe, Bruyette, & Woods, an investment bank specializing in financial institutions, in a research note.

Between the Cracks

UBS explains Wuffli's departure as the result of a boardroom disagreement over succession. Marcel Ospel, the chairman and longtime architect of UBS's expansion, wanted to step down and suggested that Wuffli move up to chairman. But the board "decided not to accept his proposal," UBS says. The board "does not view the succession of the CEO to the position of chairman as automatic."

Instead, the board decided to promote Rohner, a 42-year-old rising star, but asked Ospel to stay on for another three-year term as chairman. Wuffli, as someone put it, "fell between the table and the bench."

What seems to have happened is that some recent stumbles dulled Wuffli's luster. Chief among them was his decision, announced on May 3, to fold Dillon Read Capital Management (DRCM), UBS's U.S. hedge fund unit, back into the bank after losses in the subprime mortgage market (see, 05/03/07, "UBS: A Hedge-Fund Stumble").

Tarnished Gold

DRCM had been carved out of the bank's proprietary trading operations less than two years before by John Costas, the former U.S.-based chief of UBS's investment bank. Wuffli decided to shut down DRCM after Costas shocked the CEO by revealing that the unit had lost $120 million. Costas will remain as a senior adviser and oversee the reintegration, which will cost UBS $300 million in restructuring charges.

Letting Costas set up DRCM, which was supposed to manage a combination of UBS and client money, had always seemed like an odd decision. But insiders say Wuffli acquiesced in the move in order to head off a defection by talented traders to hedge funds. Whether the idea was smart or not, the implementation of the hedge fund unit was poorly handled, one insider says. Not only did the traders seem to lose their golden touch but they also had trouble attracting outside money.

There was other news that the board may have found troubling. UBS was embarrassed earlier this year by a scandal involving a New York employee who was charged with leaking confidential stock reports and pocketing $1 million in payoffs from traders (see, 03/26/07, "UBS: Notes on a Wall Street Scandal").

Little Sign of Trouble

Then there was the recent departure of Kenneth Moelis, the key force in building up UBS's U.S. mergers and acquisitions business. Moelis felt that UBS was being held back as a merger player by Zurich management being too reluctant to put capital on the line to facilitate deals.

And on May 3, UBS announced that net profits attributable to shareholders for the first quarter were down 7% year on year, to $2.69 billion, although earnings from continuing operations were up 4%. Although the figures are disappointing, there's little sign that UBS is in trouble. The trading losses that have been revealed so far are relatively small. For the first quarter new money flowing into the Global Wealth Management business was a healthy $37 billion. And return on equity was a strong 28.7%.

In a statement to employees on July 6, Ospel tried to reassure the troops that a rumored breakup was not in the plans. "Changes of this kind might look unsettling at first glance. But be assured that we will continue to pursue UBS's current strategic course, acting as one firm with a focus on organic growth," he said. Still, he warned, "we have to be careful not to become complacent."

What seems most likely is that a nervous board decided that it did not want to part with Ospel, who as much as anyone has been the common thread in its rise from local Swiss bank to one of the world's top financial institutions. The board also wanted to reward Rohner and Weill. Wuffli became expendable.

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