UBS Chief Resigns: Ramifications Likely to Spread

The sudden Saturday resignation of Oswald Gruebel, the former chief executive of Swiss banking giant UBS AG (NYSE: UBS), may have wide ramifications for the troubled financial institution.

Gruebel, who insisted as recently as last week that he would not step down, caved in to pressures from within and without the bank in the wake of the illegal trading scandal that will cost UBS about $2.3 billion.

As an added insult, Gruebel will receive no severance payments, according to The Wall Street Journal.

However, even before Kweku Adoboli -- the London “rogue’’ trader who allegedly engineered illegal and unauthorized trades that ultimately led to Gruebel’s downfall -- became a household name, UBS was already in a state of deep crisis.

In response to dwindling revenues and tighter global banking regulation standards, UBS has laid off thousands of employees -- with more job losses possible.

Indeed, the bank said it expects to record a huge loss in its third quarter earnings report, largely due to the activities of Adoboli. Quarterly losses at big banks usually translate into massive layoffs, especially this year.

Particularly vulnerable is the commercial bank’s investment banking segment -- which has been derided as a “casino” by some critics. Indeed, a leading Swiss politician has called for the elimination of the investment banking unit -- which, if implemented, would clearly lead to significant job cuts.

The Guardian newspaper of Britain speculates that hundreds of UBS positions in the City of London may be axed following Gruebel’s resignation.

The Guardian also stated that other senior bankers are likely to be out, perhaps even before UBS completes its international probe of the trading irregularities.

Even before Adoboli’s illegal trades became public, the bank had already cut 3,500 jobs this year.

Interim CEO Sergio Ermotti warned that "certain business areas" of the bank needed to be reviewed.

The bank has a total of 6,000 employees in the U.K., many in the damaged investment banking segment.

However, amidst all this swirl of activity, perhaps a larger question is the culture of the bank itself.

When Adoboli was identified as the “rogue” trader who conducted the unauthorized trades, UBS quickly disassociated itself from his “illegal” activities, suggesting this was an isolated incident.

However, Adoboli is hardly the first UBS employee to engage in questionable conduct.

Just prior to the global credit collapse, UBS aggressively jumped into the U.S. subprime real estate market -- a colossal blunder that led to losses of at least $38 billion (perhaps as much as $50 billion) and a subsequent bailout by the Swiss government.

A few years ago, during the onset of the global economic crisis, the bank was also accused of selling what it termed “risk-free” auction-rate securities to gullible customers, even though bank executives were fully aware the market was about to go bust.
Sued by regulators and investors, UBS was forced to repay more than $19 billion in reimbursement for the illiquid securities, and it also agreed to pay a $150 million fine.

Earlier this year, the bank paid $160 million in fines after admitting that its workers rigged bids in the market for municipal bond derivatives.

Perhaps most damaging to its reputation, UBS was closely involved in helping wealthy Americans avoid paying taxes through the establishment of secret Swiss bank accounts. The conduct was so egregious (at least 17,000 well-heeled U.S. residents were reportedly involved) that in 2007, the U.S. Justice Department threatened to prosecute the bank on criminal charges. Under pressure, the bank paid a fine of $781 million and revealed the names of its clients (thereby breaching the very notion of secrecy in Swiss banks)

According to The New York Times, a former investment banker said UBS has a system whereby individual advancement is stressed over group success.

“The problem isn’t the culture,” he said. “The problem is that there wasn’t any culture. There are silos. Everyone is separate. People cut their own deals, and it’s every man for himself. A lot of people made a lot of money that way, and it fueled jealousies and efforts to get ever better deals. People thought of themselves first, and then maybe the bank, if they thought about it at all.”

Ironically, Gruebel (who is now taking the fall of Adoboli) was recruited by UBS to rescue it from a series of blunders and historic losses under the tenures of its two prior chief executives, Peter Wulffi and Marcel Rohner.