UBS has warned of a $4 billion (Rs15,880 crore) write-down in its third quarter results arising from losses on fixed income trading. How does one of the most conservative financial institutions in the world find itself in the position of having to write off $4 billion? The answer is: by ceasing to be conservative. UBS used to be a byword for caution until greedy investment bankers bamboozled the Swiss bank into embracing greater risk-taking.
US executives such as John Costas and Ken Moelis argued that the bank’s culture was causing UBS to miss out on lucrative new opportunities created by the hedge fund and private equity (PE) boom. Given access to capital, they argued, there was big money to be made from fixed income trading, prime broking and lending to leveraged buyouts.
Over time, the bank, under the leadership of former chief executive Peter Wuffli, relented. The decisive moment came in 2005, when Costas himself, who had been threatening to leave to set up his own hedge fund, was given the resources to set up Dillon Read Capital Management (DRCM), a hedge fund within UBS using the bank’s capital.
Meanwhile, his successor, Huw Jenkins, as head of investment banking, embarked on a major hiring spree, designed to make UBS a major player in fixed income.
The unfortunate results of this dash for quick bucks are now clear. DRCM was closed last year, but its positions were absorbed by UBS and constitute the bulk of the write-downs announced on Monday.
Now, both Costas and Jenkins have gone, new chief executive Marcel Rohner—who came out of the private banking arm—is taking charge of the business.
Rohner can at least count himself lucky on one score: The investment bank’s push into new markets was not as successful as envisaged. UBS’ beefed-up fixed income still failed to break into the big league.
Indeed, only two months ago, bank executives were declaring publicly their intention to lend far more aggressively to PE groups. Rohner should be thankful the crunch arrived when it did.