This could not have come at a worse time. The Union Bank of Switzerland (UBS) has reported today that it has suffered a $2 billion dollar loss because of unauthorized trades made by trader Kweku Adoboli.
According to Reuters, Adoboli's profile on Linkedin shows that he spent the last five years working at UBS's European Equity Trading division and had previously spent three years as a trade support analyst at the bank.
"According to Adoboli’s landlord, Philip Octave, the trader lived in an expensive loft on Brune Street near London's Brick Lane. His rent amounted to $6,320 a month, suggesting that Adoboli was well payed in his role with UBS," report Reuters.
The Blaze has been watching the financial health of the Swiss banking giant very closely and, lately, they have been having a rough go of it. While this most recent loss may not be the final death knell for UBS, it will nevertheless cost the bank dearly especially considering the fact that they have been struggling to get back onto their feet ever since the start of the European sovereign debt crisis.
The San Francisco Chronicle reports:
UBS warned that it could report a loss for the entire third quarter because of the rogue trade, which may cost them as much as they were hoping to save ($2.28 billion) by cutting 3,500 jobs over the next two years. Today's news brings up many questions, with the foremost being "how the hell did this happen?"
It was not that long ago that Jerome Kerviel racked up some epic losses at Societe Generale through alleged rogue trades that involved bets worth around $68 billion. Those trades resulted in around $6.7 billion in losses at the French bank.
It is hard to fathom how UBS could have allowed a similar debacle to occur within its investment bank after seeing the fallout at Societe Generale in the wake of the Kerviel episode, which was heavily publicized across the world. However, it appears that UBS management has allowed it to happen to them.
The consequences are going to be painful—UBS shares have already lost 11.50 percent in Thursday's trading session. The culprit behind the losses is 31-year-old UBS trader Kweku Adoboli according to London police. This morning, UBS has been tight-lipped about the incident, saying that that no client money was lost and that the trades are still under investigation.
Trying to soften the blow, the financial giant sent out a statement before the U.S. markets opened that read, "UBS has discovered a loss due to unauthorized trading by a trader in its investment bank. UBS's current estimate of the loss on the trades is in the range of $2 billion. It is possible that this could lead UBS to report a loss for the third quarter of 2011."
After that, a letter was sent out to employees that--whether they intended to or not--underscored the unfortunate timing of the news: "While the news is distressing, it will not change the fundamental strength of our firm," the note said. "We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times."
According to Reuters, "the weak performance of the investment bank and tough capital rules in Switzerland had already attracted intense scrutiny over how UBS will cope. Analysts have called for a retrenchment, while Swiss politicians are debating how to make sure big banks can weather future crises without having to be bailed out by the state."
UBS shares have been under significant pressure prior to this incident. Their stock has now lost around 32 percent in 2011 and better than 38 percent over the last year as investors are worrying about the bank's exposure to Europe's sovereign debt crisis.
According to the Associated Press, Swiss banking regulator Finma said today that they have been in contact with the Swiss bank regarding the incident. A spokesman added, "From the scale of this case you can be sure that it's the biggest we've ever seen for a Swiss bank."
The incident, which will prove to be quite costly for shareholders, is raising serious questions about UBS's risk management. "The real issue ... over and above the financial impact is the reflection on risk management at UBS," said Fionna Swaffield, a banking analyst at RBC Capital Markets in an Associated Press release.
She added, "UBS was seen to have recovered significantly from the credit crisis and to have improved its risk management in the investment bank in spite of its struggle to improve returns. This obviously brings this very much into question."