Whither UBS’s investment bank?

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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