UBS in turmoil as $2 billion rogue trade hits ratings
Swiss bank UBS came under increasing pressure to shrink or sideline its investment bank business -- source of a $2 billion rogue trading loss -- as ratings agencies warned lax risk management could prompt downgrades.
The bank is expected to announce a major restructuring involving the loss of thousands more jobs at an investor day in New York on November 17, the Tages-Anzeiger newspaper said on Friday, as UBS seeks to reassure private clients.
Analysts said the massive loss, announced on Thursday, was the final nail in the coffin for UBS' investment bank which has struggled, like others in the industry, against falling markets and tough new regulation as well as the soaring Swiss franc.
Switzerland's two biggest political parties, the Swiss People's Party and the Social Democrats, want UBS to split investment banking from its wealth management arm and pressure for it take radical action is likely to mount in the wake of the scandal.
A UBS spokesman declined to comment.
We expect UBS will come under material pressure from shareholders and FINMA to review its investment bank business ... the trading loss being the final straw, leading to material restructuring, said JP Morgan analysts in a note.
Ratings agencies Standard & Poor's and Moody's put the bank's credit rating on negative watch, while Fitch said it had put UBS's viability rating on negative watch.
Fitch said the incident strengthens the arguments for UBS to down-scale its investment banking unit while S&P added: The loss is a setback to UBS' efforts to rebuild its reputation and demonstrate strengthened risk management following its weak performance in 2007-2009.
UBS is currently undertaking a strategic review of the size and shape of the investment bank division and we consider that the trading loss may influence the outcome of this process, it added.
London police are still holding the man they arrested in the early hours of Thursday on suspicion of fraud. Sources close to the situation named him as 31-year-old Kweku Adoboli, a UBS director of exchange traded funds.
UBS declined to give any new information on the case on Friday. London police also declined to comment but will have to charge, bail or release the suspect later on Friday.
SAME LAW FIRM AS NICK LEESON
UK law firm Kingsley Napley has been hired to represent Adoboli, a spokeswoman confirmed. The firm also advised rogue trader Nick Leeson, whose $1.4 billion derivatives losses triggered the collapse of Britain's Barings Bank in 1995.
Most market speculation circled around the possibility that Adoboli was caught out by the shock decision by the Swiss central bank last week to impose a cap on the red-hot franc, sending the currency plunging and Swiss shares sharply up.
Need a miracle, Adoboli wrote on his page on social networking site Facebook that day, according to media reports.
A UBS spokesman would only say that the losses were made in equities, without elaborating.
One UBS trader in London said staff were expecting news of more job cuts in the next two weeks as well as zero bonuses.
In my team people are scared and are playing low profile. The idea is to stay there and keep your job. In the current situation, it would be difficult to find another job anywhere else, the person told Reuters on condition of anonymity.
Britain's Financial Services Authority and Switzerland's FINMA markets regulator were both in close contact with the bank, spokesmen said.
A senior UBS banker said regular meetings and social events involving senior management had been canceled, which he presumed was because of crisis management or meetings with regulators.
Morale is dreadful... It's very damaging to our reputation. Equities is one of the businesses where we thought we had got it right, the banker said.
HISTORY OF MISHAPS
UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches.
The $2 billion that UBS said had been lost by the rogue dealing effectively canceled out the first year of savings from a recently-announced cost-cutting plan involving the loss of 3,500 jobs.
We believe that yesterday's event could have personnel consequences on senior management level, said Vontobel analyst Teresa Nielsen. The exit from non-core businesses inside the investment bank could be accelerated.
In the firing line are Chief Executive Oswald Gruebel, himself a former trader who was brought out of retirement in 2009 to try to turn UBS around, and investment bank boss Carsten Kengeter, the bank's highest paid employee last year.
In a Sunday newspaper interview before the scandal broke, Gruebel said how the bank would be restructured depended on how Swiss regulators planned to implement tough new capital standards that parliament is expected to approve next week.
What is clear is that we must become more efficient. That will prompt major criticism because of reductions, offshoring, outsourcing of jobs and activities, he said.
Fitch said news of the UBS loss meant Swiss parliamentarians were far less likely to accommodate banks' requests to loosen some of the relatively strict revised liquidity, capital and organization requirements.
UBS stock, which fell 10.8 percent on Thursday to end at its lowest close since March 2009, was up 4.3 percent at 10.17 francs by 1250 GMT compared with a 2.4 percent rise on the European banking sector index.
New losses in UBS's investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world's biggest wealth manager but has slipped to third place.
The concern from the wealth management client's point of view is that if UBS cannot even manage their own proprietary trading positions, how can the client expect UBS to manage money on his or her behalf, said Melvyn Teo, professor of finance at Singapore Management University.
The suspect's father, John Adoboli, a retired United Nations employee from Ghana, said he knew finance was a high risk area but he had no doubts about his son's integrity.
From what the reports are saying, it could be that he made a mistake or wrongful judgment, he told Reuters by phone from the Ghanaian port city of Tema.
($1 = 0.870 franc)
(Additional reporting by Steve Slater, Sophie Sassard and Huw Jones in London, Kwasi Kpodo in Accra and Kevin Lim in Singapore; Editing by Sophie Walker)
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