Rogue trader's $2B loss raises questions at UBS

The sign for the U.K. headquarters of the Swiss banking group UBS is seen Sept. 15, 2011, in London after it was announced that unauthorized trades by an investment banker had cost the bank $2 billion.
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Updated at 9:53 a.m. ET

GENEVA - UBS was under pressure Friday to explain how its managers failed to catch a $2 billion loss due to rogue trading, with experts calling into question the Swiss bank's ability to turn around its scandal-hit image.

The British Broadcasting Corp. reported Friday that the bank's internal monitoring system failed to discover the trades and that the bank only found out about them when the trader, 31-year-old Kweku Adoboli, notified his supervisors.

Unspecified troubles apparently started taking a toll on Adoboli last week, when, according to British newspaper The Telegraph, his Facebook page was updated to say, "I need a miracle."

The City of London police department said in a statement Friday that Adoboli has been charged with two offenses, fraud and false accounting. Police said that Adoboli would appear at City of London magistrates' court later and that investigations into the case were continuing.

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Meanwhile, the bank's investors and the wider industry wondered about the fallout, both for UBS as a storied Swiss financial institution and for the banking sector.

"Until UBS has explained in detail how such a significant loss due to unauthorized trading could happen, and how the problem will be solved, confidence will remain impaired," said Andreas Venditti, an analyst at Zuercher Kantonalbank.

Some commentators and politicians called for senior managers at UBS to take responsibility for the loss, which the bank said could put its third-quarter results in the red. Ratings agency Moody's placed UBS's credit grade on review for possible downgrade, citing worries over the future of its London-based investment unit.

Manuel Ammann, a professor of finance at the University of St. Gallen, said it would be difficult for UBS to sell the investment unit in the current depressed financial climate, though some shareholders might prefer it to be split off.

"From a risk point of view there are good grounds for separating the classic credit and payment business from the investment banking, because there's a danger of cross-infection," Ammann said. "Shareholders would prefer to have two shares of two focused companies than a single share for a conglomerate."

UBS stock on Friday recovered some of the losses suffered the day before. Investors took the chance to buy the shares cheaply, sending their price up 3.3 percent to 10.07 Swiss francs ($11.52) on the Zurich exchange by early afternoon. Shares had slumped 10 percent the day before, after the bank said a lone employee had caused the massive loss with unauthorized trades.

Swiss media questioned how one UBS trader could have managed to cause a $2 billion loss without others around him noticing sooner. Respected Swiss banking expert Hans Geiger told state-owned SF television he doubted the lone trader account put forward by UBS.

(Last year, CBS' "60 Minutes" broadcast a story about the secretive world of Swiss banking.)

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The bank refused to comment on BBC reports that it was Adoboli himself who alerted managers to the loss.

Police in London continued to interrogate the trader after extending his detention beyond the usual 24-hour deadline for pressing charges. Under British law, a police superintendent can extend the 24-hour detention period by up to 36 hours for serious crimes. After that, police would need to get a court order to continue questioning for up to 96 hours more.

Law firm Kingsley Napley, which represented Nick Leeson — the trader who brought down British bank Barings in 1995 after he made around $1.4 billion of losses in unauthorized trades — confirmed that it had been hired to represent Adoboli.

UBS spokesman Andreas Kern declined to comment on a report in Swiss newspaper Tages-Anzeiger on Friday, that the entire trading team in London where the alleged unauthorized deals took place had been suspended.

But Kern said the paper's report of fresh job cuts at the investment bank, to be announced at an investors meeting Nov. 17, referred to a reduction of about 1,600 posts already announced last month as part of a plan to save some 2 billion francs over the next two years.

The international banking industry has been trying to put stricter controls on its traders in the wake of a 2008 scandal at France's Societe Generale, when trader Jerome Kerviel gambled away 4.9 billion euros ($6.7 billion), and the infamous Leeson case.

UBS chief executive Oswald Gruebel was brought in two years ago to rehabilitate the bank's damaged reputation after a series of missteps that included massive losses in the subprime mortgage market and an embarrassing U.S. tax evasion case.

The scandal casts doubt on his ability to improve the bank's image.

Moody's ratings agency cited such concerns when on Thursday night it placed UBS's credit grade on review for a possible downgrade.

Although it said the $2 billion losses would be manageable for a bank the size of UBS, they "call into question the Group's ability to successfully complete the rebuilding of its investment banking operations."

Ammann, who has observed the Swiss banking industry undergo massive changes over the past decade, said UBS would likely survive the latest scandal.

"The financial loss can be stomached and the reputational loss can be repaired," he said.