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Swiss finished

Peter Thal Larsen 

UBS rogue: Ossie Gruebel must be regretting the day he agreed to take the helm at UBS. A $2-billion shock loss, apparently the fault of a single rogue trader, has dealt a huge blow to the Swiss bank’s post-crisis revival hopes. Though UBS can absorb the financial damage, the case for getting out of investment banking has been given renewed force.

The exact nature of unauthorised trades, which UBS only discovered a day ago, is uncertain. Police in London have arrested a 31-year-old man. According to the Swiss paper NZZ, the culprit worked in the bank’s giant equities division. UBS says no client positions were affected. But, it’s still unclear how the losses came about. Did a proprietary position go wrong? Or, was it a result of an out-of-control trader in a supposedly safe client business, similar to Societe Generale’s Jerome Kerviel n 2008?

Even if the rogue pushes UBS into a third-quarter loss, the bank should be in the black for the full year. After tax, the loss knocks about 50 basis points off its core Tier-I capital. That’s uncomfortable, but hardly life-threatening. But, the damage will delay the benefit of 3,500 recently-announced job cuts, which were meant to deliver $2.5 billion in annual savings.

The dent to UBS’s still-fragile reputation is more severe. After its near-death experience in 2008, the bank has stressed its reduced risk profile. Those claims now lie in tatters: the rogue trading loss is about 24 times the average daily value at risk in UBS’s investment bank in the second quarter. Private bank clients, who only recently stopped withdrawing their cash from UBS, have a renewed impetus to switch banks.

However, getting out of investment banking is easier said than done. It’s indeed hard to see regulators encouraging another lender to take over UBS’ business. Closing the unit, and winding down legacy positions, would involve huge costs — and more risks.

But, the bank’s rivals should resist the temptation to gloat. For the second time in four years, a single trader has racked up a multi-billion dollar loss before being caught. The argument that banks are best off when they combine investment and retail businesses just became harder to defend.

First Published: Fri, September 16 2011. 00:15 IST