My concern about succession planning at UBS was well founded. As politicians, central bankers and financiers gathered in Washington for the IMF/World Bank meetings, the UBS board met in Singapore. And contrary to what most people including myself had expected, UBS’s chief executive Oswald Grübel resigned, saying that he had to bear ultimate responsibility for the recent rogue-trading scandal inflicted on the bank by Kweku Adoboli.
There is something of a flounce about Ossie’s last dance. Few can comprehend why he resigned when he did. Several bemused bankers have murmured that perhaps he jumped to save the skin of UBS’s head of investment banking, Carsten Kengeter.
I’m not sure that is correct. My analysis is that 67-year-old Ossie had simply had enough. Perhaps he thought that life is short, the banking business today is brutish and the golf course appeared very appealing. "Look, Abigail," an insider remonstrated. "I believe that Mr Grübel did what he thought was in the best interests of the bank."
Grübel retired from Credit Suisse with an impeccable reputation. He was summoned out of retirement to save UBS. He certainly did some good things – putting the investment bank back on a firmer footing and making peace with the US authorities, which in turn staunched outflows from the private bank.
But his abrupt departure does a disservice to his legacy. In essence, he leaves UBS in a mess: albeit less of a mess than he inherited. He certainly is not handing over a stable institution to his successor. As I have written on several occasions, the banking industry has a deep loathing of succession planning. In fact, there is rarely any proper succession plan and this is an enormous disadvantage for stakeholders.
Ironically, one of the few orderly passings of the baton took place in 2007 at Credit Suisse when Grübel announced his retirement and Brady Dougan was appointed group chief executive designate. The situation today at UBS is almost the opposite of that seemly succession. Although Grübel insisted he was taking responsibility for the trading loss, he didn’t wait for the results of the internal inquiry, he didn’t wait for the bank’s new strategy to be defined and he certainly didn’t wait for a new chief executive to be appointed. The Abigail with attitude column is not impressed.
"There are still a lot of unanswered questions," a source mused. I suspect part of the answer will include a shrivelled investment bank. Ironically, in an earlier column, I pondered whether UBS’s investment bank needed to be on an expansionist trajectory and suggested that it should focus only on certain business lines and regions.
After the kleptomaniac Kweku loss, I envisage a wholesale lopping of limbs. One source talked about the bank keeping the client-facing equities and M&A businesses – for the IPO pipeline – but maybe retreating from fixed income altogether. Losing this amount of weight is probably too drastic but I do expect a radical restructuring of the investment bank, with big lay-offs before Christmas. UBS’s investment bank currently employs roughly 17,500 people.
The first people to have gone from UBS should surely have been any that had an oversight of risk management in the business.
To lose $2.3 billion through the actions of a rogue junior trader is a colossal failing of risk management and regulation. How can one individual be allowed to carry out trades that expose the institution to such extensive losses? UBS points to the fact that Kweku, a trader on its Delta One desk, was acting fraudulently. But he was obviously dealing in huge amounts. And surely any risk function has to take into account the possibility of fraud when compensation is linked to profitability? It seems pretty basic to me. If crafty Kweku’s dealing volumes had been much lower, and UBS’s oversight much higher, I doubt the bank would be in such a pickle. A source mutters cryptically: "American banks don’t have rogue traders. At American firms, the risk function rules the roost."
Hundreds of column inches have been dedicated in the past few days to trying to explain to readers exactly what Delta One trading is. It is a complex area and I do not understand it fully. But I’m beginning to wonder if the most senior bankers and risk managers in the City understand it fully either. Jérôme Kerviel, Société Générale’s notorious fraudster, worked in the same area. I’ve always believed in the kiss (keep it simple stupid) principle. Given that nearly $9 billion has been lost by two relatively junior traders in this area in the past four years, should banks be involved in Delta One trading at all? The risks certainly seem to outweigh the rewards.
I am not the only person who thinks this way. The appalling UBS incident makes it less likely that long-term investors will buy bank shares. At the weekend, I received an email from a loyal reader in Dubai. "Dear Abigail," he wrote. "The latest Euromoney issue is in front of me and as usual, the first thing I did was to go through your thoughts. As always, I cannot agree with you more on your analysis and will anxiously wait for your comments on the latest bizarre incident where a prime European bank was taken for a ride by a three-decade-old trader.
"You would assume after Barings and Lehman Brothers, at least the big ones would have fixed the issue by bringing on foolproof systems, controls and audits to avoid recurrence of such incomprehensible incidents. Continuation of such occurrences in such large institutions gives you a scare of the highest order as to what else may be going on in the prime financial institutions that we may not be currently aware of."
