London/Zurich: UBS said a trader who lost the Swiss bank around $2 billion in unauthorised deals had been arrested in London, with sources close to the situation naming the man as 31-year-old Kweku Adoboli.
Adoboli - working as a director of exchange traded funds and Delta 1 trading, according to his profile on LinkedIn - was arrested during the night at UBS’s London office on suspicion of fraud, the sources told Reuters on Thursday.
UBS said it discovered the problem on Wednesday afternoon, but gave no details of the trades involved. Police said they had arrested a man at 2000 IST on Thursday, 2-1/2 hours after being contacted by the bank.
“The man was taken to a City of London police station for questioning and he remains in custody while officers are continuing to investigate this matter,” City of London police commander Ian Dyson told reporters.
Adoboli, a University of Nottingham computer science and management graduate, was described by a former landlord as a good tenant of a 1,000 pound ($1,600) per week apartment close to UBS in London’s East End, where he lived until recently.
“I can confirm that an employee of the bank was arrested in London in connection with the statement,” a UBS spokesman said, after the bank had revealed the loss.
UBS shares dropped to their lowest close since March 2009, ending the day down 10.8 percent after it said it might post a third-quarter loss following the trades, a huge blow as it struggles to rebuild its credibility after years of crises.
The loss effectively cancels out the 2 billion Swiss franc ($2.3 billion) saving it had hoped to make in a cost-cutting programme announced last month in which it will axe 3,500 jobs.
It also threatens the future of UBS’s investment bank, which is being reviewed by chief executive Oswald Gruebel as part of a wide-ranging restructuring following heavy losses in the credit crisis and a damaging scandal over bankers helping rich US clients dodge taxes.
It also undermines claims by the Swiss bank and the industry that such events are a thing of the past.
UBS, which said no client positions were affected, is scheduled to hold an investor day on 17 Nov. at which it was expected to announce a major overhaul of the investment bank.
“The matter is still being investigated, but UBS’s current estimate of the loss on the trades is in the range of $2 billion,” the bank said in a statement.
UBS employed almost 18,000 people in its investment bank at the end of June, most of them outside Switzerland, particularly in London and the United States.
“(This) is a staggering demonstration that all the clever systems that the banks now have, especially after the financial crisis, still cannot stop a determined individual getting round them if they want to,” said Chris Roebuck, visiting professor at Cass Business School in London.
“It will yet again confirm to the majority of shareholders who are Swiss that investment banking is not ‘proper´ banking, as private banking is.”
UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches followed by repeated pledges to fix risk systems.
Any losses in UBS’s investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world’s biggest wealth manager but has slipped to third place.
“This loss has the scope to have a material impact on the perception of UBS’s private bank, impacting its future operating trends,” Goldman Sachs analysts Jernei Omahen and Peter Skoog said in a note.
“Today’s announcement therefore adds to the long list of arguments (and pressure) for a substantially smaller investment bank.”
UBS’s news caused disbelief among market operators.
The last similar case was when Jerome Kerviel, then a trader at Societe Generale , racked up a $6.7 billion loss in unauthorised deals revealed in 2008. Kerviel was sentenced to three years in prison in October 2010.
Both Kerviel and Adoboli were the same age when the scandal broke and both worked with so-called Delta 1 products, derivatives which closely track the underlying securities and give the holder an easy way to gain exposure to several asset classes. Examples include equity swaps, forwards, futures and exchange-traded funds.
“It is amazing that this is still possible,” said ZKB trading analyst Claude Zehnder. “They obviously have a problem with risk management. Even when the amount isn’t so high, it is once more a loss of confidence that casts UBS in a poor light.”
Switzerland’s financial markets regulator FINMA said it had been informed of the case and was in close contact with UBS, while a regulatory source said Britain’s Financial Services Authority was in close contact with Swiss authorities.
Heads to roll?
The bank has in the past two years tried to rebuild the investment bank that nearly felled it during the financial crisis. It needed a state bailout after heavy losses on U.S. subprime mortgage-related securities.
Under Gruebel and investment bank boss Carsten Kengeter -- themselves both once traders -- it hired hundreds of traders in a bid to boost its bond business.
Several analysts said the incident made it more likely Kengeter would be in the firing line, while Gruebel could step down sooner rather than later.
“Gruebel saved the bank from destruction, so his main job is done. It is only a matter of time before he steps down. If it means he leaves a little sooner, it does not change a lot. But the investment bank is a bit of a disaster, and the knives will be out for Kengeter,” said Peter Thorne, analyst at Helvea.
Former Bundesbank head Axel Weber is due to join the UBS board in May and take over as chairman in 2013.
The weak performance of the investment bank and tough capital rules in Switzerland had already attracted intense scrutiny over how UBS will cope. Analysts have called for a retrenchment, while Swiss politicians are debating how to make sure big banks can weather future crises without having to be bailed out by the state. ($1 = 0.870 Swiss franc)