15-09-2011: Deminor reacts to UBS trading losses

 

Brussels, September 15th 2011: UBS announced today that it has discovered a loss due to unauthorized trading by a trader in its investment bank. The bank currently estimates the loss on the trades is in the range of USD 2 billion.

 

Once more, shareholders have reasons to be concerned. Scandal after scandal, the Bank has tried to convince its shareholders that it has an efficient risk management system in place. Every time, shareholders have been disappointed. It will not be different this time.

During the 2007-2008 subprime crisis the bank had to take more than USD 50 bln losses on write downs of its CDO investments. It appeared that the bank had acquired more than USD 100 bln of these investments on its own books in different divisions of the bank while top management, which was in charge of global risk management, had no overview of its accumulated positions and concentration of risks.

 

In December, 2008, it was revealed that the bank's Luxembourg subsidiaries had engaged in a set-up of seemingly compliant UCITS funds which were nothing else than obscure "feeder" funds that had invested all of their assets with Bernard Madoff Investment Securities LLC (BMIS). Against its own internal policies and basic rules of European UCITS laws, UBS had delegated its entire custody and investment management function to BMIS without investors knowing about this. Investors who parked in good faith their money in investment funds stamped with the name of UBS were relying on an in-depth expertise, a world-class brand and a know-how deeply rooted in the Swiss banking tradition. In 2011, when investors are still trying to recover their losses, all these positive words so often associated with UBS have totally disappeared from their minds. In addition, the bank remains saddled with hundreds of millions of potential liabilities.

Finally, in the same "annus horribilis" 2008 it was revealed that UBS had helped thousands of wealthy U.S. individuals to evade taxes. Under pressure from the U.S. authorities, the bank handed over the names of 4,000 UBS account holders and paid a USD 780 m fine to settle the dispute. "Paying 1 or 2 billion francs today after having written down more than $50 billion doesn't make a big difference" said a Zurich-based analyst to Bloomberg while commenting on the U.S. tax probe. This is the kind of synicism that UBS has left with the investor community.

For the year 2010 the bank paid CHF 4.3 bn of bonuses, in comparison with CHF 4.8 bln the year before. As a comparison, net profit attributable to all shareholders was CHF 7.2 bn for FY2010. To be fair, Oswald Grübel declined his bonus citing the weak stock market price as a reason. But is one man able to rein in those animal spirits driven by short term bonuses?

Apparently not. Bankers may say that the risk of rogue traders cannot be avoided. However, did compliance function properly? Were there efficient checks and balances to ensure that the trader's positions were checked by independent persons?

What all these scandals have in common, is that they reveal a persistent problem of corporate governance and risk management. UBS' top management will now have to show that big rhetoric about improving the company's culture and risk management is not enough. When in 2010 shareholders pressed the company's management to initiate litigation against former directors and managers who had could be held responsible for the CDO losses, the company replied that it was not in the company's interest to file such actions. However, if they are successful, they could at least lead to reclaiming part of the undeserved bonuses.

Corporate governance should not remain a textbook exercise. It must be applied vigorously in practice. But when shareholder activism and corporate governance demands do not help, litigation may be the only remaining option. Bob Monks, a leading specialist in corporate governance once called it "corporate governance at gunpoint". Bank managers, traders and all other executives who receive risk-free options to play with shareholders' money should feel that there is a downside to their risky games.