Germany

UBS Fallout: When “Star Power” Counts Too Much In The Banking World

Back at HQ in Switzerland, the $2 billion debacle of UBS’s investment banking arm has focused attention on CEO Carsten Kengeter, who used to work for Goldman Sachs, and made his name in the pursuit of “risk”. Now 17,000 employees are slated for job cuts.

(twicepix)
(twicepix)
Andreas Flütsch

ZURICH - Soon after he was named CEO, the German-born "star" banker made it abundantly clear the way he ticks. Carsten Kengeter told attendees of Investor Day at UBS in London in November 2010 that he wanted to drive the UBS's investment banking arm as fast as his countryman Sebastian Vettel, Formula 1 World Champion, raced cars.

Less than a year later, he's now seen it crash and roll with a $2 billion rogue trader scandal, after the arrest in London of 31-year-old Kweku Adoboli, a UBS director of exchange traded funds, accused of "unauthorized trading."

For UBS top honcho Oswald Grübel, who appointed him, Kengeter was the right guy for the job. In 2009 Grübel had stated publicly that his goal was to get UBS back, within a few years, to where it was earning gross annual profits of 15 billion Swiss francs ($17 billion). And in order to make that happen, a year ago he switched the investment banking arm from a cautious path of consolidation to full-on expansion.

"Risk is our business, and we know what we're doing," he said on that same 2010 Investor Day in London.

Kengeter had risen rapidly through the ranks at Goldman Sachs – the US investment bank known on the market for its aggressiveness and hearty appetite for risk -- in Frankfurt, London and Asia, before moving over to UBS shortly before the 2008 financial crisis. After the subprime mess, he was supposed to raise the morale of the troops and whet their appetite again for risk-taking.

Risk strategy was Grübel's idea

Grübel held the opinion that UBS's investment banking arm, which had landed it with $50 billion of toxic debt during the financial crisis, was – after its post-debacle clean-up – too risk-averse and not profitable enough.

Grübel was reluctantly forced to back down from his ambitious profit goals recently, however. The consequences to the UBS investment banking arm of the return to risk-taking that Grübel ordered have turned out to be a lot more serious than the just-reported $2 billion dollar loss due to the unauthorized trading.

Kengeter did what he was told and hired so many other "star" bankers that costs exploded. Nearly 60% of return was going to salaries, as compared to less than 50% the year before. Any yet return was by no means as high as desired. To lighten the huge load of costs that were dragging profits down, several thousand employees of the 17,000 employed by the investment-banking arm worldwide were to be let go.

Kengerter not only had to offer extremely high salaries to get other top performers on board, he himself, with a total package of 13.2 million euros in 2009 and 9.3 million in 2010, was UBS's best-paid manager.

Whether or not Kengeter can weather the storm unleashed by the latest development is still an open question. The same goes for Grübel.

Meanwhile, the troops in the UBS investment banking arm are doubtlessly feeling more exposed than ever, especially as the high rate of staff turnover that started with the financial crisis continues at top levels -- with even entire teams moving over to the competition. Even before the latest scandal, some worried that the risk-happy Kengeter and his Goldman Boys just might have the bank headed for a serious crash.

Read the original story in German

Photo - twicepix

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