- A rogue trader has cost Swiss banking giant UBS an estimated $2 billion
- The massive fraud has prompted renewed calls for UBS to sell off its investment bank
- UBS executives acknowledged the scandal will rip through UBS's fragile customer base
The last Facebook post of Kweku Adoboli, the 31-year-old UBS trader at the centre of a $2bn rogue trading scandal, read simply: "need a miracle".
So too, now, does UBS. The Swiss group's efforts to rebuild its investment banking business were already faltering before the news broke that Mr Adoboli was arrested in the early hours of Thursday morning on suspicion of orchestrating a massive fraud.
While UBS should be able to absorb a $2bn hit to its balance sheet, its disclosure prompted renewed calls for the group to split off or sell its investment bank and shift its focus exclusively to its flagship wealth management arm.
"How many times do we have to see huge UBS losses?" said Simon Maughan, head of sales and distribution at MF Global in London. "It looks unreformed, unwieldy and ultimately unsustainable. This could be a critical tipping point for UBS's strategy."
In Switzerland, politicians seized on the revelation as further proof the government needs to rein in its outsized banking sector through tougher capital measures and stricter limits on risk-taking.
"For a bank that has made mistakes in the past, it's absolutely unacceptable," said Fulvio Pelli, the party president of the Liberals. He later added that a Swiss bill designed to tackle its "too big to fail" banking sector, in addition to tougher capital requirements was the way forward.
Oswald Grübel, UBS's chief executive, has spent the past two-and-a-half years pulling the group back from the brink following $50bn in crisis-era writedowns in investment banking. In the same period, the bank was hit by a prolonged investigation into whether it helped wealthy US clients evade taxes through its Swiss private bank.
After establishing some early momentum, the bank's dismal results for the first half of this year prompted Mr Grübel to outline a sweeping cost-cutting programme in July. It scaled back its ambitions in investment banking to only providing products and services required to support its private bank.
Senior UBS executives acknowledged that the latest scandal would rip through the bank's fragile customer base, dealing a another heavy blow to a group whose reputation among corporate and private banking clients had only just begun to recover. During its damaging tussle with US regulators over tax, for example, UBS saw SFr165bn in assets under management walk out the door.
"This is the very last thing we needed or wanted," said one. "Our people have been through enough."
UBS vowed to improve its risk management and compliance procedures in the wake of its near-meltdown in the crisis. It brought in Maureen Miskovic, the former head of risk at Lehman Brothers and US-based financial services group State Street, at the start of the year with a promise to continue a root-and-branch overhaul of its procedures.
Details of Mr Adoboli's trading activities were still emerging on Thursday night. But the case, thought to be the third-largest bank rogue trading scandal, drew immediate parallels with the €4.9bn ($6.8bn) hit caused to French bank Société Générale by Jérôme Kerviel in 2008.
Like Mr Kerviel, Mr Adoboli engaged in a form of derivative trading known as "Delta One," a fast-growing but shadowy corner of investment banking that involves trading securities that track an underlying asset, such as shares or silver, as closely as possible. It is often associated with exchange traded funds (ETFs) and swaps.
The scale of the alleged loss -- which UBS said was expected to push the bank into the red for the third quarter -- effectively wipes out SFr2bn in planned cost costs over the next two years, most of which was to come from 3,500 job cuts. During the second quarter, UBS's average daily "value at risk" -- banks' standard measure for the maximum amount of trading losses they are exposed to in a single day -- stood at only SFr75m.
"I just can't understand how this could have happened," said one banker engaged in similar trading activity at a US investment bank. "It's just too big a number. It must be a 'Kerviel' event where they thought there was a hedge to those transactions."
UBS should be able to withstand the financial hit -- the bank had SFr38.4bn of tangible equity and SFr33bn of core tier one capital at the end of the second quarter. The trading loss, in the context of these amounts is 4.4 per cent and 5.2 per cent respectively, according to an analysis by Goldman Sachs.
Whether any of UBS's senior executives, including Mr Grübel or Carsten Kengeter, the former Goldman Sachs partner who heads up UBS's investment bank, will be forced to fall on their sword will depend on the extent of any fraudulent activity involved, analysts and UBS insiders speculated.
Mr Grübel, who is also credited in Switzerland with turning around Credit Suisse, UBS's main domestic rival, said in a memo to employees that while the news was "distressing," it would not change "the fundamental strength of our firm".
"He will have lost a lot of credibility, politically, among the people over this," said one senior banker of Mr Grübel. "It's really, really sad that, after his long career, including his moving to turn around UBS, he should be tainted by something like this," said another.