Bloomberg News

UBS Placed on Review for Downgrade by S&P, Moody’s, Fitch

September 16, 2011

(Updates with S&P and Fitch from first paragraph.)

Sept. 16 (Bloomberg) -- UBS AG, which said it sustained a $2 billion loss from unauthorized trading at its investment bank, had its credit ratings put under review for possible downgrade by Standard & Poor’s and Moody’s Investors Service.

The examination “will center on ongoing weaknesses in the group’s risk management and controls that have become evident again,” Moody’s analysts led by Robert Thomas said yesterday in a statement. S&P said in a statement today it will make a decision on the ratings “once further details emerge on the scale of the loss and the risk management lapses that enabled it to occur.”

The loss would be “manageable” for UBS if it’s confirmed at about the announced level, the ratings companies said.

The incident deals a blow to Chief Executive Officer Oswald Gruebel’s attempts to rebuild the investment bank after the division recorded 57.1 billion Swiss francs ($65 billion) in cumulative pretax losses in three years through 2009. Moody’s said it will consider how the event affects the company’s ability to grow investment-banking revenue in an “appropriately risk-contained way.”

“The losses call into question the group’s ability to successfully complete the rebuilding of its investment banking operations,” Moody’s said. “We have continued to express concerns with regards to the ability of management to develop a robust risk culture and effective control framework while at the same time trying to re-establish its position in certain market segments.”

London Arrest

London police arrested Kweku Adoboli, a UBS employee, in connection with the loss, according to a person with knowledge of the situation who requested anonymity. The matter is under investigation and the “current estimate of the loss on the trades is in the range of $2 billion,” UBS said yesterday, the third anniversary of the collapse of Lehman Brothers Holdings Inc.

“The loss is a setback to UBS’s efforts to rebuild its reputation and demonstrate strengthened risk management following its weak performance in 2007-2009,” S&P said. “UBS is currently undertaking a strategic review of the size and shape of the investment bank division, and we consider that the trading loss may influence the outcome of this process.”

Based on current information, the review may result in UBS’s A+ long-term counterparty credit rating either being lowered by one level or confirmed, S&P said.

Standalone Risk

The Moody’s review applies to Zurich-based UBS’s standalone financial strength rating and long-term debt and deposit ratings, according to the statement. It also will examine the impact on the company’s private-bank and wealth-management businesses, Moody’s said.

Fitch Ratings also said today it is placing UBS’s “viability rating,” which reflects the bank’s standalone risk, on review for a possible downgrade, while affirming the company’s issuer default ratings.

“Fitch acknowledges that no control framework can fully protect a bank from a ‘rogue’ trader,” the rating company said. “However, the magnitude of the loss is large in the context of UBS’s reduced investment bank activities and compared to other ‘rogue trader’ incidents at other institutions. This incident strengthens the arguments for UBS to down-scale its investment bank.”

--Editors: Frank Connelly, Dylan Griffiths

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net. Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; David Scheer at dscheer@bloomberg.net.


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