UBS has become the latest bank to experience a rogue trading scandal as it revealed that a 31-year-old trader had been arrested in London on suspicion of blowing a $2bn hole in its books, exactly three years after Lehman Brothers collapsed.
Kweku Adoboli, a director on the little-known “Delta One” derivatives desk, was being held on Thursday at Bishopsgate police station after he was arrested at 3.30am, as the Swiss group’s shares plunged 10.8 per cent.
UBS warned that the discovery – which drew parallels with the €4.9bn ($6.8bn) hit caused to Société Générale by Jérôme Kerviel in 2008 – could push the group into a loss for the third quarter.
“We understand that you have already had to contend with unfavourable, volatile markets for some time now,” Oswald Grübel, UBS’s chief executive, said in a memo to employees. “While the news is distressing, it will not change the fundamental strength of our firm.”
One person inside UBS’s investment bank, which has been struggling to rebuild after writing off $50bn in toxic debt during the financial crisis, said staff were “shell-shocked”.
According to people close to the matter, UBS did not discover the suspected rogue trading activity until midday on Wednesday, about 12 hours before they asked police for Mr Adoboli to be arrested.
“Around 1am the City of London police was contacted by UBS about an allegation of fraud by one of their employees,” commander Ian Dyson said late on Thursday afternoon. The individual arrested would remain in custody while detectives investigated the matter, Mr Dyson said.
Mr Adoboli’s last update to his Facebook page, dated September 6, simply reads “need a miracle”. Since news of his arrest broke, friends of Mr Adoboli have flooded his profile with messages of support.
News of the loss is likely to have wide-ranging repercussions for UBS, and will spur critics of investment banks’ lucrative, but sometimes risky trading activities.
Both Finma, the Swiss banking regulator, and the UK’s FSA have already been in contact with UBS. A spokesperson for Finma said: “From the scale of this case, you can be sure that it’s the biggest we’ve ever seen for a Swiss bank.”
The UK’s Serious Fraud Office is also considering whether to open an investigation.
The revelation that a trader in “Delta One” – an area of derivative trading activity that is one of the only remaining ways for banks to take big bets with their own money – could cause such a catastrophic loss has prompted calls for fresh restrictions on investment banks.
“Management doesn’t understand what’s going on in the Delta One desks,” said Terry Smith, chief executive of Tullett Prebon, the interdealer broker. “If you sat down with a CEO and asked them to please explain what happens they would try but they couldn’t give you an accurate answer because they don’t understand.”
Analysts at Goldman Sachs said the trading losses were a reason to “sharply scale back” investment banking at UBS.
“The key area of damage in our view is reputational and extends beyond the investment bank, into UBS’s private banking business,” the Wall Street bank said in a note to clients.
Analysts had forecast net profits of about SFr1.3bn ($1.5bn) for the quarter, but are now revising their outlook. UBS shares, down nearly 85 per cent in the past five years, fell 10.8 per cent to close at SFr9.75 in Zurich.
UBS’ investment banking division has only just begun to recover from near-disastrous losses during the financial crisis. Some stability has returned at the unit under Carsten Kengeter, the former Goldman Sachs executive who joined in 2009.
The bank’s last annual report said that “increased risk taking” had been authorised since 2010 “for incremental trading activity.” However, some Swiss politicians, still angered by the state bail-out of UBS in late 2008, are likely to take the trading scandal as “proof” that the bank should focus exclusively on its less risky private banking and fund management activities.
Uncomfortably for UBS, news of the losses came on a day when the lower house of the Swiss parliament was set to debate amendments to banking laws to reduce the risks from groups viewed as “too big to fail”.
The news will also prompt doubts about Mr Grübel, the veteran Credit Suisse chief executive who came out of retirement in February 2009 to head UBS.
Mr Grübel joined UBS with a simple message for the bank’s traders: “Don’t lose any money” – a dictum that was modified last year amid rebounding markets to “still don’t lose any money, but do more.”
As a “hands on” manager and a former trader himself with an acknowledged “nose” for the markets, Mr Grübel will find Thursday’s revelation particularly unwelcome, say peers.
Additional reporting by Alice Ross, Caroline Binham and Mark Wembridge in London