UBS dogged by series of disasters

Ambition to be world’s top global investment bank is gone

In the boom years of the early 2000s, UBS enjoyed a reputation as one of the world’s premier banks. But it was not quite at the top of the tree. That fact was not lost on the bank itself, or its then chief executive, Marcel Ospel, who set out on an ambitious mission to make the Swiss lender the “number one in global investment banking”.

A decade and several scandals later, such ambitions are long gone. In October, Sergio Ermotti, UBS’s new chief executive, unveiled a plan to cut its investment bank in half, and the lender is in the process of shedding 10,000 jobs. Mr Ermotti is adamant that there is no connection between the role of UBS’s traders in manipulating Libor and his decision to shrink the investment bank. Analysts, however, see a strong link between the bank’s former growth ambitions and the numerous scandals that have afflicted it in recent years.

“If you look at when [these scandals] happened, these were the years when UBS were desperate to build up its FICC business to catch up with its US rivals,” says Christopher Wheeler, an analyst at Mediobanca.

“They were behind the curve and they were cutting corners to catch up. I don’t think the culture as a whole was bad, but there were parts of the bank where it was, and controls across the whole bank were too loose to stop problems occurring,” he says.

Control failings certainly loom large in the extraordinary sequence of disasters that have hit UBS since its early 2000s peak, as even former UBS employees admit. “In large parts of this franchise, the culture was rotten,” says a former manager. “The controls and risk-taking in large parts of the business were dysfunctional.”

The first manifestation of these weaknesses was subprime. In its eagerness to catch up with its rivals in FICC, UBS created an in-house hedge fund unit focused on credit markets in 2005.

However, the unit’s bets on securities linked to subprime mortgages got out of hand. UBS shut the unit down in 2007, but a year later, was forced to take a $37bn writedown on subprime products, bringing the bank to the brink of collapse and forcing Mr Ospel to resign as chairman.

This crisis was followed in short order by another stemming from compliance failures, this time involving UBS’s wealth management operations in the US, where regulators extracted a fine of $780m from the bank in 2009 in order to settle allegations that it had helped wealthy US clients evade taxes.

The respite won by that settlement did not last long. UBS’s attempts to rebuild its reputation were again thrown into disarray last autumn when it became embroiled in the largest unauthorised trading loss in British history, when Kweku Adoboli, a trader on its ETF desk in London, built up positions that cost UBS $2.3bn to unwind and led to the departure of Oswald Grübel as chief executive.

The question now is how far his successor has got in reversing such problems. Mr Ermotti insists that UBS has tightened its procedures significantly, but points out that changing the culture of a big bank is “not a big bang event, it is a journey,” adding that “you have to be aware than we can minimise risk, but not eliminate it entirely”.

Other current and former executives sound confident that the Libor settlement is an important landmark in UBS’s attempt to lay past ghosts to rest.

“This was an absolutely key risk,” says one. “Yes, it’s an expensive settlement. But sometimes you just have to hold up your head and say ‘these were terrible mistakes’, then pay the price and move on.”

Indeed, dealing promptly with the Libor scandal – settling second out of potentially more than a dozen institutions – is seen as a feather in Mr Ermotti’s cap. “This is a big opportunity for Sergio to take a bank with big integrity problems and prove he can fix it. Sergio is pretty impressive at the cultural stuff,” says one executive.

Yet despite the Libor settlement, UBS still has much housekeeping to do – as a glance at its provisioning for regulatory matters shows. Once the Libor fine has been paid, UBS will still have about SFr1.5bn ($1.64bn) set aside for such issues. Some regulators are still investigating, and civil suits loom large.

Mr Wheeler of Mediobanca reckons that UBS’s new leadership team of Mr Ermotti and Axel Weber, who replaced Kaspar Villiger as chairman, are “beyond the half way mark” in dealing with their troubled inheritance.

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