UBS admitted on Monday half of the $18.7bn writedowns it suffered last year on US subprime securities had stemmed from the decision by traders in its investment banking division to hold, rather than repackage and sell, one particular category of security linked to US residential mortgages.

Contrary to most expectations, the UBS report reveals Dillon Read Capital Management, the in-house hedge fund closed in May 2007, accounted for only 16 per cent of last year’s writedowns. Most analysts had believed DRCM was the main culprit.

In a damning 50-page report ahead of tomorrow’s shareholders’ meeting, the bank admitted it overturned a strategy to hold and repackage so-called “Super Senior” tranches of collateralised debt obligations in favour of holding them permanently on its own books.

The decision, which contrasted with UBS’s traditional role as a middleman, was the single main factor behind the losses that turned UBS into the biggest European casualty of the subprime crisis. UBS says it was made because traders, benefiting from cheap funding thanks to the group’s big private banking business, thought they could make more money holding such securities than passing them on to clients.

Matters were exacerbated by operations on another part of the bank’s CDO desk, the so-called CDO “warehouse”, where securities were stored and repackaged, normally over a period of up to four months. Although such operations were subject to risk assessment procedures, “there were no aggregate notional limits on the sum of the CDO warehouse pipeline and retained pipeline positions”, according to the report.

“The fixed income division was focused on revenue maximisation regardless of risk with no limits on balance sheet usage, and bonuses were paid regardless of the damage done to the UBS franchise long term,” noted Peter Thorne, analyst at Helvea, the Swiss brokerage.

UBS said the writedowns had arisen in three areas. About two thirds arose from the CDO desk – with the overwhelming bulk coming from the ill-fated Super Senior strategy.

A further 16 per cent stemmed from DRCM, while some 10 per cent derived from the bank’s treasury operations.

Positions held by smaller or more specialised units in the investment bank accounted for the remainder.

However, the report confirms earlier statements from the bank that DRCM proved far more taxing to create than expected.