Rogue trader loses UBS $2 billion
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Rogue trader loses UBS $2 billion

Swiss firm’s reputation for risk management in tatters again after discovering losses from unauthorized trading in UBS’s London office

UBS has revealed that a London-based trader at the Swiss investment bank has accumulated around $2 billion worth of losses through unauthorized trading, meaning the bank may report a loss in its third quarter results this year.

“The matter is still being investigated, but UBS’s current estimate of the loss on the trades is in the range of $2 billion,” says UBS in a statement. “It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.”

News services are reporting that a 31-year-old ETF trader based in London, Kweku Adoboli, is now under arrest.

The statement comes just three weeks after the bank announced that it will cut 3,500 jobs as part of a cost cutting programme to save around SFr2 billion, or around $2.3 billion. Some 45% of the reduction will come from the investment bank, 35% from wealth management and Swiss bank, while another 10% will be lost from global asset management and 10% from wealth management Americas.

Most worrying for UBS’s executives, led by CEO Ossi Grübel and investment bank chief Carsten Kengeter, will be the impact of the news on the bank’s reputation for risk management.

Before the sub-prime crisis, UBS had thrived for decades on the back of its strong track record in risk management. This was particularly important for its market-leading private banking and wealth management division.

That reputation was quickly lost as the extent of UBS’s losses across its main divisions were revealed in 2007 and 2008. UBS admitted to structural failings in risk management throughout its business in a report requested in April 2008 by the Swiss Federal Banking Commission.

In the aftermath of UBS’s losses, the bank suffered quarter after quarter of net outflows from wealth management clients. Grübel, the former Credit Suisse chief brought out of retirement to run his former competitor, has spent the past two and a half years attempting to redeem UBS’s reputation. Client business began recording net inflows again last year. Now much of that work risks being undone overnight by one rogue trader.

When Euromoney contacted UBS the bank declined to comment on its risk practices.

Euromoney has continually warned that banks have failed to take the necessary steps to overhaul their risk management practices, most recently in our September 2011 issue.

UBS’s rogue trader, if convicted, will join a roll-call of shame in the financial markets that includes Baring’s Nick Leeson and Société Générale’s Jérôme Kerviel.

When Kerviel’s €5 billion of losses were discovered, it was not long before the French firm’s head of investment banking, Jean-Pierre Mustier, stood down from his position. Questions will now be asked about which senior UBS executive will carry the can for this loss.

The most important task for Grübel and incoming chairman Axel Weber, the former head of the Bundesbank, will be to make sure that clients don’t take fright at this latest example of the Swiss bank’s unfortunate habit of making costly slip-ups to both its balance sheet and its reputation. 

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