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Rogue trader suspected in $2 billion loss at UBS

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Rogue trader suspected in $2 billion loss at UBS Empty Rogue trader suspected in $2 billion loss at UBS

Post by Dr. Manhattan Thu Sep 15, 2011 9:35 am

Rogue trader suspected in $2 billion loss at UBS

Swiss bank UBS says rogue trader causes $2 billion loss, arrest made in London

Frank Jordans and Paisley Dodds, Associated Press, On Thursday September 15, 2011, 9:09 am

LONDON (AP) -- Swiss banking giant UBS said Thursday that a rogue trader has caused it an estimated loss of $2 billion, stunning a beleaguered banking industry that has proven vulnerable to unauthorized trades.

Police in London said they arrested a 31-year-old UBS trader, Kweku Adoboli, in the alleged fraud. UBS declined to confirm his name.

Switzerland's largest bank warned that it could report a loss for the entire third quarter as a result of the rogue trade, while shares in UBS AG plummeted 8.7 percent to 9.98 francs ($11.41) on the Zurich exchange by early afternoon.

The case immediately evoked memories of Jerome Kerviel, the trader at French bank Societe Generale who secretly gambled away euro4.9 billion ($6.7 billion). The scale of that fraud rocked the global financial industry and prompted banks to tighten oversight rules to ensure such large sums couldn't be traded unnoticed.

The Swiss banking regulator Finma said it was in contact with UBS about the incident, which was discovered late Wednesday.

"From the scale of this case you can be sure that it's the biggest we've ever seen for a Swiss bank," Finma spokesman Tobias Lux told The Associated Press.

UBS provided little specific information, saying the information was still under investigation and no client money was involved. The unauthorized transactions could cost UBS almost as much as the 2 billion Swiss francs ($2.28 billion) the bank said last month it hoped to save by cutting 3,500 jobs over two years.

It comes as UBS is struggling to restore its reputation after heavy subprime losses during the financial crisis that resulted in a government bailout, and an embarrassing U.S. tax evasion case that blew a hole in Switzerland's storied tradition of banking secrecy.

Adoboli's profile on the professional networking site LinkedIn showed he spent the past five years working at UBS's European Equity Trading division after three years as a trade support analyst for the bank. He graduated from England's University of Nottingham in 2003, where he studied computer science and management.

According to Philip Octave, Adoboli's former landlord, he lived in an expensive loft on Brune Street for several years before moving out about 4 1/2 months ago. The area is near London's Brick Lane, a busy street of curry houses, bars and vintage fashion shops only a few blocks from UBS's U.K. headquarters.

Octave described Adoboli as a well-dressed quiet man of African origin who "was not the tidiest" of people but very well spoken.

He fell behind in the rent twice but always paid up in the end, Octave said, adding that his rent was a hefty 4,000 pounds per month (US$6,320). He said he asked him to move out so he could refurbish the apartment.

"He was not a party chap," Octave said. "I found no problems."

Adoboli's profile picture on Facebook showed a black-and-white photograph of an African man in his early 30s, with interests including photography, cycling and boutique wines.

Banking observers immediately highlighted the similarities to the Kerviel case, which also involved a trader in his early thirties entrusted with responsibility for vast sums of money.

The debacle that befell Societe Generale, France's second-largest bank, resulted in Kerviel being convicted in October 2010 on charges of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly euro50 billion ($68 billion) between late 2007 and early 2008. He was ordered to pay the bank back all the money he had lost and banned for life from working in the financial industry.

By coincidence, the Swiss parliament was slated to debate the future of the country's banking industry Thursday. Lawmakers are being asked to consider proposals to ensure that Switzerland's two biggest banks -- UBS and Credit Suisse Group -- are brought under tighter control as they are considered "too big to fail."

"The real issue ... over and above the financial impact is the reflection on risk management at UBS," said Fionna Swaffield, banks analyst at RBC Capital Markets.

"UBS was seen to have recovered significantly from the credit crisis and to have improved its risk management in the investment bank in spite of its struggle to improve returns. This obviously brings this very much into question."

In a terse statement shortly before markets opened Thursday, UBS informed investors that "UBS has discovered a loss due to unauthorized trading by a trader in its investment bank."

"UBS's current estimate of the loss on the trades is in the range of $2 billion," it added. "It is possible that this could lead UBS to report a loss for the third quarter of 2011."

In a letter sent to its employees, the bank said it regretted that the incident came at a difficult time.

"While the news is distressing, it will not change the fundamental strength of our firm," the note said. ""We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times."

It promised to keep employees briefed on developments in the case.

Peter Thorne, a London-based equities analyst at Helvea, said the loss was financially manageable for UBS, Switzerland's biggest bank. But he said it was a blow to the reputation of UBS and its management, and reinforced the case of slimming down the investment banking unit.

UBS chief executive Oswald Gruebel recently warned that the bank wouldn't achieve its aim for a pretax profit of 15 billion francs a year by 2014. UBS earned some 2.8 billion francs during the first half of the year, with the investment bank contributing 1.2 billion before tax.

UBS has been pressing to restore its reputation after suffering huge losses relating to toxic debts in the United States and needing a $60 billion bailout from the Swiss government.

In other trading debacles, Nick Leeson, a British trader working in Singapore for Barings Bank, made unauthorized futures trades that lost more than $1 billion and led to the venerable bank's collapse in 1995. The infamous case prompted banks worldwide to tighten their internal checks.

Leeson was released from a Singapore jail in 1998 for good behavior after serving 3 1/2 years of a 6 1/2-year sentence. He claimed he did not make a cent from his disastrous trades but Barings' liquidators sought the return of 100 million pounds on any of his earnings relating to Barings.

Jordans contributed from Geneva. John Heilprin in Geneva, and Bob Barr, Greg Katz, Raphael G. Satter and Pan Pylas in London contributed to this report.

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Post by Dr. Manhattan Sun Sep 18, 2011 8:10 pm

UBS raises rogue equity trade losses to $2.3 billion

ReutersBy Emma Thomasson and Silke Koltrowitz | Reuters – 4 hrs ago

ZURICH (Reuters) - Swiss bank UBS increased the amount it said it had lost on rogue equity trades to $2.3 billion on Sunday and Chief Executive Oswald Gruebel said the alleged fraud would have consequences for strategy and possibly also for himself.

"It is obvious that these incidents will have an influence on the strategy of the investment bank," a visibly chastened Gruebel told Swiss television, adding that the firm would present a new strategy for its investment bank soon.

"I will bear all the consequences of the incident. They will be announced as soon as we put them in practice," he said.

UBS stunned markets on Thursday when it announced unauthorised trades had lost it some $2 billion. London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

UBS said in a statement on Sunday the trader concealed "unauthorised speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months" by creating fictitious hedging positions in internal systems.

"The loss arising from this matter is $2.3 billion. As previously stated, no client positions were affected," it said.

Global stock markets have been extremely volatile in recent months, plunging on concerns over euro zone and U.S. debt crises and then rebounding on hopes for their resolution.

BUCK STOPS WITH GRUEBEL?

The loss is a disaster for the reputation of Switzerland's biggest bank, which had just started to recover after it almost collapsed during the financial crisis and faced a damaging U.S. investigation into aiding wealthy Americans to dodge taxes.

"Loss even more. Reads like they're making excuses," Helvea analyst Peter Thorne said of the UBS statement in an e-mail.

The new scandal has prompted calls for UBS's top managers to step down and for its investment bank to be split into a separate unit from its core wealth management business.

Chris Wheeler, bank analyst at Mediobanca, said there would be pressure on UBS to address the investment bank fast.

"That had been planned anyway for the investor day on November 17 and there may be pressure on them to accelerate that."

Gruebel, who was brought out of retirement in 2009 to turn the bank around, was quoted in a newspaper on Sunday as saying he was not considering quitting over the crisis, but said it was up to the board to decide.

In a memo to staff on Sunday, he said: "Ultimately, the buck stops with me. I and the rest of senior management are responsible for dealing with wrongdoing."

Swiss newspapers quoted unnamed insiders as saying the UBS board and important shareholders such as the Singapore sovereign wealth fund still backed Gruebel, with immediate changes the last thing the bank needs and an obvious successor lacking.

CONFIDENCE, SECURITY, DISCRETION?

The bank, whose three keys logo symbolise "confidence, security, discretion," has for now pulled its "We will not rest" global advertising campaign that was designed by advertising agency Publicis to try to rebuild its image.

Meanwhile, UBS client advisers have been writing to customers to reassure them of the underlying financial strength of the bank despite the trading loss, a spokesman said.

"That we now suffer this setback at this point in our efforts to improve our reputation is very disappointing. This incident also sets us back somewhat in our capital-building efforts," Gruebel said in his memo to staff.

"However, I wish to remind you that our fundamental strengths as a firm remain intact... we remain one of the best-capitalised banks in the industry.

UBS said its board of directors had set up a committee chaired by independent director David Sidwell, former chief financial officer at Morgan Stanley, to conduct an independent investigation into the trades and the bank's control systems.

A source close to the bank said the trades involved positions with a notional value of about $10 billion.

The bank said it had covered the risk resulting from the unauthorised trades, and its equities business was again operating normally within previously defined risk limits.

It said the trader had allegedly concealed the fact his trades violated UBS risk limits by executing fake exchange-traded fund (ETFs) positions.

"Following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorised activity," the bank said.

ETFs are index funds listed on an exchange and can be traded just like regular stocks. They try to replicate index performances and offer lower costs than actively managed funds, but regulators have warned about risks from some complex ETFs.

The instruments involved in the UBS case are similar to those that Jerome Kerviel, the rogue trader at Societe Generale, traded when he racked up a $6.7 billion loss in unauthorised deals in 2008.

Christoph Blocher, vice-president of the right-wing Swiss People's Party (SVP) -- the country's biggest -- renewed his calls for a splitting off of the investment bank.

"One has to seriously examine a ban on investment banking for commercial banks," he told the SonntagsZeitung newspaper, adding his party might team up with the center-left Social Democrats to push for such a move.

(Reporting by Emma Thomasson and Silke Koltrowitz; Additional reporting by Steve Slater in London; Editing by David Hulmes and Peter Graff)


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Post by ToddS Mon Sep 19, 2011 6:45 pm

UBS faces dual attack in parliament after trading loss

ReutersBy Emma Thomasson and Edward Taylor | Reuters – 29 mins ago

ZURICH (Reuters) - The Swiss parliament piled pressure on the nation's biggest banks on Monday in the wake of UBS AG's $2.3 billion loss from rogue trading, as a center-left party pushed for a ban on risky investment banking and a plan to raise capital requirements passed the lower house.

Social Democrat lawmaker Susanne Leutenegger Oberholzer narrowly failed to get enough support for her proposal to reopen debate on tough new capital measures for UBS and Credit Suisse so that a ban on investment banking could be added.

The plan to force the banks to hold more capital than under global rules so that they can be shielded from future crises was passed, and the Social Democrats have the option of bringing a separate piece of legislation on the proposed ban.

"What the latest debacle of UBS in London shows is that regulation must go further as fast as possible. Investment banking must be banned for systemically-important banks and proprietary trading must be massively limited," the party said in a statement.

UBS has kicked off an internal investigation into the catastrophic failure of its risk systems that led to the equity trading loss, which was discovered last week.

UBS said its board of directors had set up a committee chaired by independent director David Sidwell, former chief financial officer at Morgan Stanley, to conduct a probe into the trades and the bank's control systems.

"External expectations are that the investigation should take weeks and not months," a UBS insider told Reuters. "The internal investigation will be coordinating with the regulators on their probe."

London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

CAPITAL HIT

UBS said on Sunday it remains one of the world's best capitalized banks, even though the $2.3 billion loss had set it back in its efforts to build up its capital to meet new regulatory requirements.

In Britain, where similar reforms to separate risky investment banking from commercial banking are in the works, Business Secretary Vince Cable said the UBS scandal illustrated the need for change.

"If there were any doubts about the need for radical reform, the UBS rogue trader has dispelled them," Cable told delegates at his Liberal Democrat party's conference.

The Swiss parliament rejected the bid to reopen the debate so that an investment banking ban could be discussed by 55 to 42 with six abstentions.

The loss is a heavy blow to the reputation of Switzerland's biggest bank, which had just started to recover after its near collapse during the financial crisis and a damaging U.S. investigation into its aiding wealthy Americans to dodge taxes.

Chief Executive Oswald Gruebel, brought out of retirement in 2009 to turn the bank around, said the alleged fraud would have consequences for strategy and possibly also for himself.

The UBS source said there was no indication that others were involved in the affair, and the global synthetic equities team in which Adoboli worked was still operating, but added that members of the team would have to stop trading while answering questions as part of the investigation.

UBS shares closed down 1.9 percent at 10.07 francs, but still outperformed a 3.4 percent slide on the European banking stocks index, as traders noted the stock had already fallen sharply after last week's news.

ANGRY BANKERS

UBS is now widely expected by analysts to speed up an overhaul of its investment bank that had been planned for announcement on November 17, though big shareholders have signaled they could wait until that date while the bank completes its internal investigation, according to the inside source.

An investment manager whose company holds shares in UBS said he had detected anger within UBS's private banking operations at the turn of events. "I talked to several senior private bankers, and one told me how he spent last week with compliance arguing about a 1,500-franc accounting difference ... And then some junior investment banking trader loses 2 billion.

"It creates serious ill will among their clients. So internally there will be some momentum to resize IB."

Along with Gruebel, Carsten Kengeter, head of the investment banking unit, may be in the firing line. "We estimate that the investment banking chief Carsten Kengeter ... will be sacrificed after this scandal," said analyst Dirk Becker at broker Kepler.


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