Did UBS Suffer From Taking Risks Or Being Too Conservative?

Poor UBS just couldn’t get it right. When the head of its US investment bank quit last year, he complained that it was just too Swiss and not prepared to take the risks necessary to play in the Wall Street major league. A mere 12 months later, UBS has chalked up total losses of $37 billion (£18.6 billion) on its US mortgage-related holdings, making it by far the biggest loser in the sub-prime meltdown. The fact that UBS, of all banks, should be claiming that distinction still beggars belief. Senior executives always emphasised that UBS could not afford to take as much risk as the likes of Goldman Sachs because doing so would scare nervous clients in its huge wealth-management business in Switzerland. Yet UBS has fallen into every hole it could find. Not only has it lost a fortune taking bets on US mortgages (along with Morgan Stanley), it has also suffered huge writedowns in its business which repackages mortgage securities for sale to clients (like Citigroup and Merrill Lynch). In the circumstances, even a great survivor like Marcel Ospel could not hold on. His departure is well overdue. Whether Peter Kurer is the right person to replace him as chairman is another matter. The last head of a financial giant to hand over the reins to the in-house lawyer was Sandy Weill at Citigroup. And look how well that went. But investors welcomed Mr Ospel’s exit and the stock jumped 12 per cent as the proposed capital-raising reduced the risk that UBS could fail. With Lehman Brothers raising $4 billion yesterday and interbank lending rates falling, investors once again dared to believe that the worst of the credit crunch may be over. Even if it is, however, there is a lot more pain to come in the City. Mr Ospel’s departure will only increase speculation about the future of UBS’s investment bank and its nearly 9,000 employees in London. Marcel Rohner, the chief executive, comes from the wealth-management side and failed during yesterday’s call with analysts to rule out a disposal of the investment bank. Executives insist that there are benefits from keeping the investment bank with the rest of the group. But there are also clearly disadvantages. UBS confirmed that those nervous clients in Switzerland have been scared enough by its problems to withdraw some of their funds. There are certainly senior figures on the wealth-management side who believe that the group should be split up. Wall Street rivals say that UBS was touting its PaineWebber arm for sale in the US at the end of last year without success. There is no doubt that the stock would soar if UBS could rid itself of its investment banking arm. By hiving off the toxic securities into a separate vehicle, UBS would be able to offer a clean investment bank to potential purchasers. The snag is that such purchasers are thin on the ground these days. With the Wall Street banking model facing serious questions, it is hard to believe that the likes of Lehman would be interested. It is now more probable that some of the Wall Street banks will seek a comfortable future in the arms of the big commercial banks, such as Bank of America. As for HSBC, it is unlikely to have the stomach for a big deal at the moment. Nor would anyone move until it becomes clearer how much more capital regulators will force investment banks to hold. One thing is certain - if the investment bank remains a part of UBS, it will be a smaller part. All the signs are that the job cuts due to be unveiled in the next few weeks will be deep. And it will not be the last such announcement that the City will face this year.

After grooming himself for the role of Tiny Tim, the US Treasury Secretary now finds he is being cast as the villain

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