Andrew Winning/ReutersA security guard in front of a UBS bank in London on Thursday.
8:43 a.m. | Updated UBS said on Thursday that a rogue trader in its investment bank had lost $2 billion, a fresh blow to the beleaguered Swiss bank.
The police in London have arrested a European equities trader, Kweku Adoboli, in connection with the case, according to a person with direct knowledge of the situation who was not authorized to speak publicly.
The incident raises questions about the bank’s management and risk policies at time when it is trying to rebuild its operations and bolster its flagging client base. The case could also bolster the efforts of regulators who have pushing in some countries to separate trading from private banking and other less risky businesses.
The revelation about the rogue trader comes as the bank tries to regain its financial footing. Last month, UBS announced it would shed 3,500 jobs, following poor second-quarter results. In an internal memo, the bank said the unauthorized trading could drag down earnings in the third quarter to a loss, adding that “no client positions” were involved in the “unauthorized trading.”
“It’s a shock, a real negative surprise,” said Panagiotis Spiliopoulos, head of research at the private bank Vontobel in Zurich. “People thought that after the bank had been revamped following the 2008 crisis, it was set up in a way that could avoid this kind of event.”
Shares of UBS dropped more than 8 percent on Thursday, while the broader European banking sector was up.
The UBS rogue trading case is the biggest such incident in Europe since Jérôme Kerviel’s unauthorized trades in equity-linked futures at the French bank Société Générale in 2008. Mr. Kerviel was convicted last October of breach of trust and other crimes and sentenced to at least three years in prison. He was also ordered to pay restitution of 4.9 billion euros ($6.7 billion), the amount the bank lost in unwinding his trades
In connection with the UBS matter, the police in London arrested a 31-year-old man on suspicion of fraud by abuse of position. While the authorities did not release his name, the bank confirmed that the person arrested was the trader in question and that he had worked in London.
UBS said the matter was still being investigated and did not disclose other details. Regulators declined to comment on the trades or the markets in the case.
Analysts have offered conflicting theories on his trades, with some suggesting they involved stock-related financial products and others pointing to derivatives in the foreign exchange market, which is worth an estimated $4 trillion a day.
“The question that will be posed is how could this happen given the fact that all banks have committed to reduce proprietary trading,” said Rainer Skierka, an analyst a Sarasin, another private Swiss bank, referring to the practice of firms trading with their own money. “The next question is how the supervisor’s line of control works.”
Mr. Skierka said the loss was unlikely to materially affect the capital position of UBS. The bank — with 38.7 billion Swiss francs ($44.2 billion) and a Tier 1 ratio of 18 percent, based on criteria from the Bank for International Settlements — is among the strongest worldwide.
“It’s more about the timing — given current discussions in the Swiss Parliament on the ‘too big to fail’ problem of systemically relevant banks — and reputational issues,” he said.
Swiss lawmakers this autumn are due to debate new rules designed to shore up their two giant banks, UBS and Credit Suisse. Those contentious laws are of particular importance to the Swiss, because banks there generated 6.7 percent of the country’s gross domestic product in 2010, according to the Swiss Bankers’ Association.
There had been calls in the country for the banks’ investment units to be split from their deposit taking sides. But those proposals fell by the wayside and were replaced with plans for tighter capital adequacy rules.
British regulators have been informed of the UBS trading case and are in contact with their Swiss counterparts, the Swiss Financial Market Supervisory Authority. Tobias Lux, a spokesman for the Swiss authority, could not be reached for comment.
UBS has been struggling to turnaround its operations after the crippling events of 2008 when it was forced to accept government support. Earnings at the financial firm fell to 1 billion francs in the latest quarter, from 2 billion francs in the period a year earlier. In a move to cut costs, the bank announced in late August that it would eliminate 3,500 jobs, with 45 percent coming from the investment banking unit.
This latest episode will present an immediate challenge to a management team that is in flux.
Axel Weber, a former Bundesbank chief, is set to take over as chairman from Kaspar Villiger next year. And the UBS chief executive, Oswald Grübel, who was brought out of retirement to stabilize the bank in 2009, is expected by analysts to follow Mr. Villiger into retirement in the next couple of years.
Julia Werdigier and Chris Newens in Paris contributed reporting.
The internal UBS memo:
Dear colleagues,
We regret to inform you that yesterday we uncovered a case of unauthorized trading by a trader in the Investment Bank. We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated, but we currently estimate the loss on the trades to be around 2 billion US dollars. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.
We understand that you have already had to contend with unfavorable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm.
We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times.
We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened. We will keep you updated on the progress of our investigation.
Yours,
The Group Executive Board
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