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Switzerland

How UBS Can Cash In After Its $2.3 Billion Debacle

Analysis: After last week’s arrest of a rogue trader accused of fraud that cost the Swiss bank $2.3 billion, UBS shareholders could actually wind up benefiting from a new structure that splits off the investment banking from the commercial business. But t

(twicepix)
(twicepix)

ZURICH - It is time for UBS to rethink its business model. More precisely, it needs to get rid of its investment banking operations, the business that makes it easy to lose in seconds what an entire crew of asset managers and consultants have earned from a hard day's work. After last week's arrest of Kweku Adoboli, 31, charged with fraud and false accounting dating back to 2008 that racked up $2.3 billion in losses, even the Neue Zürcher Zeitung, a Swiss paper known for its sobriety, asked, "Splitting Off Investment Banking Wings: The Solution To Uncontrollable Proprietary Trading?"

The argument is as follows: It simply isn't right that the more stable commercial banks – or God forbid, the taxpayers – should make up for the billions squandered away by traders in London and New York. Especially when the soaring profits the traders make merely flow back into their own salaries. Discontentment is growing, even within the banks themselves. "It's the investment bankers," says a wealth manager at UBS Zurich, "they ruin everything."

The pressure on banks has been growing for years, and increased significantly after the financial crisis forced the Swiss state to take UBS under its wing. Nevertheless, the bank has yet to abandon its integrated model. "The reason is simple," say banking expert and author René Zeyer. "A separation would be good for shareholders but bad for the traders themselves." They would have to carry their own risk. And the top managers at the commercial bank would have to accept more regular, but significantly lower bonuses.

Even Konrad Hummler, managing partner at Wegelin & Co, pointed out that the high wages in the investment banking groups has influenced the rest of the industry. "The direct impact for us is a higher salary expectation in the financial industry," he said. There is little incentive for bank managers to separate from the risk-intense business.

Lower returns, higher shares

However, a study conducted by the JPMorgan Research Department suggests that investors are likely to benefit from a split within the bank. The investment banking business , according to market observers, contributes little to the long-term value of the bank; and a split, which would lower both risk and capital gains, would also increase the price of UBS shares.

René Zeyer predicts the same. He calculated the potential for returns without the investment banking group at around five percent – significantly lower than UBS Chief Oswald Grübel's fantasy of 15 percent. "It would be an honest and sustainable growth," said Zeyer. He is convinced that investors would have great confidence in a bank that chose to leave the current circus of the financial industry. "This bank's stocks would be as prized as the Matterhorn (mountain peak)," he said, "and their value could double."

Defenders of investment banking argue that their sector provides important services to the bank. After all, the group does more than just high-risk proprietary trading. The consultants also put together and sell packages that enable the funding of mergers or expansions. A large Swiss company, for example, can turn to investment bankers to obtain new bond money for a buyout in India.

UBS could continue its investment banking activity, and simply let go of its proprietary trading. Or it could look for new, independent investment banking services. This would have the advantage of forcing investment bankers to convince more asset managers of their performance before they invest large amounts of client money. "Because of cheap financing from retail banking and wealth management," we have taken on too much risk, says Hummler. Separating the investment bank would make transactions more expensive, but it would also make them safer.

Read the original article in German

photo - twicepix

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