Economy

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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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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