Whither UBS’s investment bank?

By Felix Salmon
September 16, 2011

The UBS brand name hides a long and storied history of bold-name investment banks. You’ve probably never heard of Savory Milln, Banque Stern, or Ducatel-Duval, but you might remember Chicago’s O’Connor & Associates, you probably remember Dillon Read and SG Warburg, and you almost certainly remember PaineWebber.

Yet this historic merchant-banking behemoth now looks as likely to die as it is to live. Martin Wolf’s point is well taken among Swiss regulators: they didn’t like the idea that they were ultimately responsible for the actions of this huge investment bank, even before yesterday’s news broke about a rogue trader and a $2 billion black hole. UBS is a deposit-taking commercial bank based in Switzerland, and as such the Swiss government has to keep it solvent. But right now keeping the depositary institution solvent means backstopping rogue traders as well. So the Vickers idea is a good one, as Wolf explains:

Ringfencing is relevant, because it addresses what is now the biggest danger of all: rogue universal banks.

So here’s the question: What is UBS’s investment bank worth? Like all investment banks, its assets leave the building every evening, and if today’s bonus rumblings are true, a lot of them might choose not to return. The investment bank has made an unimpressive $1.4 billion in 2011 to date, and will almost certainly now finish the year with a loss. And that of course is on top of the $50 billion that UBS wrote down during the financial crisis.

I’m sure there’s real value in the investment bank somewhere, but selling or spinning it off would be decidedly non-trivial in the current environment. Few people want to buy global investment banks right now, not with all the regulatory uncertainty hanging over them, and the institutions who are in the business don’t seem to have much appetite for getting bigger. On top of that, it’s hard to see any non-Swiss domestic regulator embracing the idea that they should suddenly become responsible for a sprawling organization which — as we’ve seen more than once — clearly has wholly inadequate internal risk controls.

According to Robert Peston, UBS didn’t even discover rogue trader Kweku Adoboli’s losses — he volunteered the information to them. (My theory, by the way, is that the losses have to be related to the huge move in the Swiss franc: as Paul Amery points out, the famous “need a miracle” Facebook status update appeared on the same day the Swiss National Bank made its announcement, and the value of the currency plunged by 10%. Given that the Swiss franc isn’t going to spike back any time in the next few days, Adoboli must have known he could never make back those losses, and realized that he had no choice but to fess up.)

(Update: According to Peston, my theory is wrong: the loss “came from lots of small trades over months”, he writes, and “were not particularly associated with the decision earlier this month of the Swiss National Bank to force down the value of the Swiss Franc”.)

Peston also reports that “the Swiss government is putting intense pressure on UBS to separate or close its investment banking operations.” That comes as no surprise. The question is how rump UBS might achieve such a thing — and whether it can extract any value from its storied investment bank at all while doing so. One thing it’s certainly going to need: some extremely sophisticated M&A advice. Now, where to find such a thing?


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thanks for the update, Felix.

this doesn’t make it any less bad for UBS. How do they not notice billions in accumulating losses? I guess the answer would be that positions were marked by the trader according to his whim, somehow, and were clearly marked wrong – not accurately? But that doesn’t really make sense either, as “lots of small trades” would have definitive PnL recognized when they were closed out… Which leaves lots of small repetitions of the SAME trade, accumulating risk, and gets us back to the “how the f*ck did UBS not notice the accumulating risk” ? question….

If you can’t detect these kinds of risks/losses, you can’t be in the business…

Posted by KidDynamite | Report as abusive

On the bright side, since the Swiss government has to bail out UBS, maybe they won’t have to worry about their franc going up in value.

Posted by KenG_CA | Report as abusive

If UBS closes out their Investment Banking operations they will see their wealth management business decline. The advantage to having your investments at a firm which is bringing out IPO’s and secondary rounds of financing, both dept and equity is recognized by most everyone who has substantail funds available for investment. Not only is that operation a profitable one at every other bank, it is profitable at UBS. So what sense would it make to damage your bottom line, cutting a profitable operation which also enhances what people say the firm wants to focus on, wealth management. They are way too smart to make this mistake. Probably talk generated by their competition to damage UBS business and the realtionships they have with clients. And no I do not work there, or have any money there, just an observer commenting.

Posted by jonradin | Report as abusive

Where is the new $2 billion going to come from? Job losses, government funding, sale of Investment banking division, more ‘rogue’ trading or creative accounting?

Posted by ex-fungi | Report as abusive

“What is UBS’s investment bank worth? Like all investment banks, its assets leave the building every evening…”

No, no, no, no. Like all investment banks wrapped up in a universal bank, its main asset is the backstop of a sovereign government, which most certainly does not leave the building every evening. I know all the traders at IBs will whine that they could walk out of their IB and find a job at a hedge fund just like that, but it’s just not true. Most of the jobs – and certainly managing ETFs – which these traders do, is the kind of capital intensive, operationally risky, and low profit (wrt nominal), that only makes sense if you have the implicit backstop of a sovereign government. And most of what hedge funds do do, rely essentially on the existence of investment banks backed by sovereign governments; without this backstop, most hedge funds would wither away as well.

Posted by thereala | Report as abusive

I would guess most US investors have thought of Swiss banks as unusually prudent and wiser than most. So I thought looking at the ten year stock record might be illuminating. According to Google Finance here is the record: Wells Fargo up 12.76%; JP Morgan down 10.27%; Credit Suisse down 25.37% and UBS down 43.70%. (I used US banks that didn’t collapse like Bank of America or Citicorp but rather ones that survived as did the Swiss banks). Thus Swiss banks appear to have done relatively badly in the last ten years. Worse than the better US banks.

Posted by Chris08 | Report as abusive

Chris08, not sure how much you can read into that…

(1) The Fed has supported ultra-low interest rates over the last few years to help prop up the US banks. Hardly surprising that those which have survived have (somewhat) prospered.

(2) Wells Fargo absorbed Wachovia at a bargain price. JP Morgan acquired Washington Mutual. Good for the winners, bad for those that folded.

(3) Share price isn’t a perfect proxy for financial health.

Posted by TFF | Report as abusive

It’s a good thing we can rest assured that this “rogue trader” was an isolated case and all the other traders are operating entirely within the strict oversight of the responsible corporate risk-management and accountability standards. I mean, they’ve all learned their lessons and play by the rules, right?

Posted by Moopheus | Report as abusive