Thursday, September 22, 2011

UBS Staffed by Idiots

Perhaps the aristocratic heritage of Swiss banking has generated their version of Charles II of Spain. That's the poor, misshapen sap to the right with only 2 great-great-great-great grandparents, a family tree that converges.

I wrote a rather fawning post complimenting UBS on their candor and perception when the wrote up their 2008 debacle. They seemed to have identified key errors in judgment, and were refreshingly detailed in the origin of their write-down (I never saw anything similar among US banks). Everyone slips up now and then, and so I figured that was a sign of a healthy organization that merely made a singular mistake.

However, 2 strikes and you are out. Reading snippets about their $2B loss via some low-level trader makes me think the bank is thoroughly incompetent. This 'Delta One' desk had a $7B rogue trader loss only a couple years ago, so they should have been keenly aware of the potential risks (this was at Soc Gen--the businesses have the same Delta One name for some reason). To generate that kind of loss implies several levels of fail within risk management, the trading desk itself, and the back office. It's easy to think a couple people screwed up, but this must have involved at least a dozen important people who apparently got paid to surf the web all day.

When I worked for a large bank there were many senior executives who were good at playing the game, but ultimately ignorant of how banks made money. These include those who were good at glad-handling the various political bodies that were essential to many of our strategic efforts, such as what businesses we could enter, and keeping competitors out under the pretext of protecting the consumer. Unfortunately, as $115MM Citigroup executive Bob Rubin showed, such skill doesn't translate in an ability or even interest in nitty gritty issues like what's on the balance sheet. A smart banker avoids positions unrelated to the core business of originating and distributing loans and deposits and other financial instruments. For example, it does not make sense to trade corn futures if you have no business with futures exchanges or corn growers.

I used to think the Swiss financial types were smart, with their solid currency and all. Perhaps they merely avoided both World Wars, which could have been due to savvy strategy, but also chance. They seem to have good general competence (thus the nice mea culpa on their 2008 write-down), but are too aloof or naive for the realities of modern banking. They should stick to chocolate.


J said...

All those clients of Swiss banks whose names were stolen and sold to tax authorities will agree with you: Swiss bankers are uncommonly incompetent. My grandfather's preWWII Swiss account also disappeared, so I have my own doubts about their honesty too. Incompetent, yes, dishonest, when nobody is watching, but Charles II of Spain...? Don Carlos Segundo not only suffered an extreme version of the Hapsburg lip, his tongue was too long for his mouth that he had difficulty speaking and drooled. He also suffered from an oversized head, intestinal upsets, convulsions and, according to his wifes, absolute impotence.

Blixa said...

How many Swiss are there in UBS' London office (where the fraud occurred), or even in their global investment banking business?

Melmotte said...

You may want to find a copy of Dirk Schutz's 1998 book *The Fall of UBS*, which lays out how UBS was derailed more than a decade ago by poor decisions and bad risks. Back then, salvation came through a merger with Swiss Bank Corp.

So this latest boondoggle isn't strike two for UBS, it's strike three. Despite the candour of their 2008 post mortem, the only thing that UBS appears to have learned - to borrow an old cliche - is that they haven't learned anything.

Dipper said...

well ... now Grubel's resigned. Thats bad news for all staff in UBS investment bank. And where UBS leads, who knows who else will follow?

Anonymous said...

A distinction should be made between small private banks and global banks with Swiss origin, namely CS and UBS. The latter two are only "Swiss" in name and origin today.

Many Swiss Private banks however are still limited partnerships, ie. top management is liable with all their personal wealth. Needless to say these banks are more prudent and focus only on wealth management.

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