Rogue Trader Causes $2 Billion Loss For UBS

"How the hell did this happen?" Unauthorized Trades Lead to $2 Billion Loss for Financial Giant Talk about bad news coming at an inopportune time...Swiss banking giant UBS revealed on Thursday that a rogue trader lost $2 billion for the firm through unauthorized trades. While the loss may not amount to a knockout punch, it is sure to sting the bank, which was already on the ropes in the wake of the European sovereign debt crisis. 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 in God’s name 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. The bank put out a statement prior to the opening of U.S. markets 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." A letter sent to employees 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." UBS shares had already been under significant pressure prior to this incident. The stock has now lost around 32 percent in 2011 and better than 38 percent over the last year as investors fret over the bank's exposure to Europe's sovereign debt crisis. UBS was also severely impacted by the U.S. mortgage meltdown in 2008 and nearly went bankrupt. The bank required a $60 billion bailout from the Swiss government amid massive losses on toxic debt. On the professional networking site LinkedIn, Adoboli's profile 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. He graduated from the University of Nottingham in 2003 with a degree in E-commerce and digital business. 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. Swiss banking regulator Finma told the Associated Press 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. 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." San Francisco Chronicle The early morning arrest in London of Kweku Adoboli, a 31-year-old UBS trader, deals a significant blow to Switzerland’s biggest bank, potentially threatening the future of its investment banking operations and undermining Oswald Gruebel, UBS’s chief executive. UBS said on Thursday that it suffered a loss in the range of $2 billion from unauthorized trading at its investment bank, which might lead the bank to be unprofitable in the third quarter. UBS’s shares tumbled by more than 9 percent in Swiss trading following the announcement and opened more than 9 percent lower in New York. The damage to the reputation of UBS and its attempted turnaround is much more serious, however, than the financial loss. Gruebel, a 67-year-old former trader, was already a polarizing figure in Switzerland. UBS is a seriously troubled big bank, suffering larger losses than just about any other European bank during the height of the credit crisis. It needed a massive bailout rescue from the Swiss government just to keep going. Gruebel, who is German and led a turnaround as CEO of Credit Suisse, was tapped by the board of UBS to pull off some magic a second time. But to pursue his one-bank strategy that calls for the bank’s divisions to work closely together, Gruebel has fought off attempts by Swiss regulators to restrict certain operations, specifically at the investment bank. His moves even raised fears that he would relocate the investment banking operations out of Switzerland. Gruebel has poured resources into the investment banking operation at the same time that some in Switzerland disapprove of it. Now Gruebel’s leadership will surely be called into question. His bank’s investment bank will receive even more scrutiny and some Swiss politicians will likely be emboldened to insist UBS focus only on less-risky banking operations. Forbes The bank has in the past two years tried to rebuild the investment bank that nearly felled it during the financial crisis. It needed a state bailout after heavy losses on U.S. subprime mortgage-related securities. Under Gruebel and investment bank boss Carsten Kengeter -- themselves both once traders -- it hired hundreds of traders in a bid to boost its bond business. Several analysts said the incident made it more likely Kengeter would be in the firing line, while Gruebel could step down sooner rather than later. "Gruebel saved the bank from destruction, so his main job is done. It is only a matter of time before he steps down. If it means he leaves a little sooner, it does not change a lot. But the investment bank is a bit of a disaster, and the knives will be out for Kengeter," said Peter Thorne, analyst at Helvea. Former Bundesbank head Axel Weber is due to join the UBS board in May and take over as chairman in 2013. 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. Reuters