UBS Gets Whacked by Subprime Mess

Staid UBS was blindsided by the subprime dive, leading to big losses and layoffs, but investors are cheered by changes in top management

by Stanley Reed

UBS, which was formed in 1997 when Union Bank of Switzerland was acquired by Basel-based Swiss Bank, has been known since that epoch-making deal as a steadier performer than its accident-prone Zurich rival, Credit Suisse (CS). But suddenly, buttoned-down UBS (UBS) looks like it has gone haywire. On Oct. 1 the bank disclosed that it was writing down $3.4 billion in losses largely due to ill-considered bets on the U.S. subprime market. This, the bank said, would lead to a loss of as much as $683 million for the third quarter when the bank reports its results on Oct. 30. UBS said it would cut about 1,500 jobs, or about 7%, of its investment banking workforce.

Marcel Rohner, who suddenly replaced Peter Wuffli as chief executive (BusinessWeek, 7/6/07) on July 6, also announced the departure of both Huw Jenkins, head of investment banking, and Clive Standish, the chief financial officer, who is retiring. Standish will be replaced by Marco Suter, a former chief credit officer, who had been serving as executive vice-chairman and as a close adviser to the chairman, Marcel Ospel. Suter will leave the board of directors and take up the CFO job as part of sweeping moves by the bank to tighten what seems to have been a flawed approach to risk, especially in the U.S.

Time to Rethink Investment Banking

The news prompted a 3.5% rise in the bank's shares, meaning investors think Rohner is making a serious effort to deal with shortcomings and is being candid about the extent of losses. In addition, European International Financial Reporting Standards accounting rules, with their strict mark-to-market requirements, may be accentuating the bank's losses, according to Simon Adamson, an analyst at CreditSights, an independent credit research firm. Lehman Brothers (LEH) and Goldman Sachs (GS) recently reported better-than-expected results—but for June through August, not the July through September interval about which UBS is warning, when the impact of the subprime mess began to widen.

Still, the big losses and management turmoil raise questions about whether UBS's efforts to compete with U.S. rivals such as Morgan Stanley (MS) and Goldman make sense. Once again there will be calls to ditch investment banking and trading—or somehow separate them from the reliably profitable private banking and asset-management businesses that constitute the real bread-and-butter of UBS (as well as Credit Suisse). It's also questionable whether a major global investment banking and trading operation can be properly managed from the relatively small city of Zurich.

Now Rohner is taking personal charge of investment banking to bring it under control. Credit Suisse has already done much the same. Some 300 to 350 people on UBS's troubled fixed-income side will be gone by the end of the year, Rohner said. At the same time, he stressed his commitment to investment banking—but even so, UBS is likely to pursue a less risky, less costly model. That may make it difficult, however, to retain top people. Already the bank has lost key operatives, including Kenneth Moelis, who built up the U.S. mergers-and-acquisition business.