UBS’s axe wielding could prove game changer


Abigail Hofman
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For some reason, the phrase “Denial is not a river in Egypt” resounds in my mind.

Since Lehman Brothers failed in October 2008, many senior investment bankers have turned their faces to the wall and refused to accept the new reality. Most of my contacts insisted that the industry was not in secular decline. “It’s a bad phase,” they murmured. “Things will improve next year.”

Few of the bulge-bracket players would countenance the notion that their businesses were substantially overstaffed, that costs were out of control and that the soft-touch regulatory environment had gone forever. I was stunned by the arrogance, greed and, let’s be frank, stupidity of the industry.

Then there was a public backlash against big bonuses. So what did the investment banks do? Did they rethink their compensation model – come together as an industry and agree that they were going to cooperate on implementing lower pay?

Of course not! Senior investment bankers wailed that they couldn’t cut staff remuneration because otherwise their best people would go elsewhere. Instead, they raised fixed salaries to ridiculous levels – often three times pre-crisis levels. This elevated fixed costs and meant that any restructuring would be infinitely more expensive.

Then came UBS. And maybe now the game has changed. In late October, UBS’s chief executive, Sergio Ermotti, announced a radical restructuring of the investment bank. Essentially, most of the fixed-income trading business was divested in to a non-core operation that will be wound down over the next few years. The bank hopes to reduce risk-weighted assets by SFr100 billion ($107.7 billion) with this move and some 10,000 jobs will go in the group by 2015.

So UBS’s investment bank-lite will focus on advisory, equities and foreign exchange. The ostensible aim is to align more closely the functions of the investment bank with the needs of the wealth management business. Carsten Kengeter, former co-head of the investment bank, will take charge of the non-core portfolio while his co-head, Andrea Orcel, runs the investment bank.

So where does this leave UBS? Perhaps for the first time in a long while, if ever, the bank has placed itself at the forefront of strategic thinking in the industry. For years the investment bank had under-performed, or rather slithered erratically from one banana skin to another. Might Axel Weber, the former Bundesbank president, who took the role of UBS chairman in 2012, be responsible for this reorientation? Or is it the new Italian broom at the bank – Ermotti and Orcel?

They were former colleagues at Merrill Lynch where Ermotti was co-head of the equities business and Orcel ran investment banking. Investors appear to love the new strategy and the share price has soared 18% since the October 30 announcement. But Orcel’s reputation is that of a deal-maker, not a manager, so I will watch closely to see how things work out at UBS.

I am also a little surprised that Rajeev Misra becomes global head of financial solutions in this recent restructuring whereas his former co-head, Roberto Hoornweg, is leaving the bank. Misra is like Marmite: you either love him or hate him. He undoubtedly has one of the smarter credit-oriented minds in the business. But he was also closely associated with the mounting credit losses that caused Deutsche Bank to teeter in 2008. Credit restructuring has been one of the few bright spots for UBS’s investment bank in the past couple of years, so perhaps he deserves the chance. But one thing is for sure: UBS cannot afford any more red ink.

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