Rogue Trading: UBS Could Take Significant Hit From Kweku Adoboli's Actions

With UBS losing approximately $2 billion from unauthorized trades by a "rogue" trader, the road for recovery for the Swiss bank could be long.

"This is a big reputation embarrassment to them," Ted Scott, director of global strategy at F&C Assessment Management, told Bloomberg Television's The Pulse, but he noted that it was still difficult for internal regulators to oversee the day-to-day action of traders.

Scott said the company will have to impose even tighter controls on trading and could even lead to the dividend for shareholders getting cut.

The stock went to its 52-week low of $11.21 in trading earlier on Thursday before settling out to $11.41 by close, down 10.02 percent from the previous close of $12.68. The 52-week high of the stock is at $20.08.

"We are a strong and growing franchise and one of the leading wealth management firms in the world," Bob McCann, head of UBS's wealth management in the U.S., e-mailed financial advisers, according to Dow Jones Newswires. "Today's news doesn't change that."

Fortunately, UBS has enough capital to absorb the loss; it made a pretax profit of $1.9 billion in the second quarter, according to The Wall Street Journal. But with financial institutions already taking a hit from the ripple effects of the economic downturn, the news could cause further difficulty for an already beleaguered industry.

Under CEO Oswald Grubel, the bank, according to The Journal's Simon Nixon, said it "implemented new risk-management practices, pulled back from proprietary trading and focused on a low-risk client driven model. This incident will test the faith of investors, clients and regulators."

European regulators have frequently floated the idea of separating wealth management divisions of banks from the general banking divisions. This incident could renew those calls.

The trader, 31-year old Kweku Adoboli was arrested on Thursday by London Police on suspicion of fraud by abuse of position, and is currently in custody at Bishopgate police station. Adoboli, originally from Ghana, graduated from Nottingham University with a degree in computer science and began working for UBS in London in 2006.

A short statement was released by UBS at approximately 9 a.m. EDT. It read:

"UBS has discovered a loss due to unauthorized trading by a trader in its Investment Bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of USD 2 billion. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected."

Unfortunately for UBS, the rest of the European banking industry had a good day. Shares of Societe General rose 4.79 percent, Barclays rose 3.45 percent and HSBC rose 3.55 percent.