UBS on Review for Moody’s Downgrade

$2 billion loss warrants risk control evaluation

It wasn’t bad enough that a rogue trader at Swiss bank UBS AG managed to lose $2 billion in unauthorized transactions. And it was ironic that the loss was announced on the third anniversary of the Lehman Brothers collapse. The same day the loss hit the news, the firm was placed on review by Moody’s Investors Service for possible downgrade over its risk control measures.

As previously reported by AdvisorOne, a UBS employee, Kweku Adoboli, was arrested in the wee hours of Thursday morning in London on suspicion of fraud by use of position. The losses had been discovered late Wednesday. Bloomberg reported late Thursday that Moody’s took the action preparatory to an examination that, according to a company statement, “will center on ongoing weaknesses in the group’s risk management and controls that have become evident again.”

Moody’s analysts, led by Robert Thomas, added that the loss “would be manageable for the group given its sound liquidity and capital position.” The review is aimed, according Moody’s, at UBS’s standalone financial strength rating and long-term debt and deposit ratings; it will also look at the impact on the company’s private bank and wealth management businesses.

Reuters reported Friday that the loss was expected to cause UBS to reduce its investment bank business altogether, and perhaps fire senior executives as well. It cited Swiss newspaper Tages-Anzeiger saying that UBS insiders predicted an announcement at a November 17 investor day in New York that the bank would engage in a major restructuring and cut thousands more jobs. The event is bound to be difficult; the loss, according to the report, has negated the entire first year of savings from UBS’s recently announced cost-cutting plans that included shedding 3,500 jobs.

JPMorgan Chase analysts said in a note, "We expect UBS will come under material pressure from shareholders and FINMA to review its investment bank business ... the trading loss being the final straw, leading to material restructuring."

In its statement, Moody’s said, “The losses call into question the group’s ability to successfully complete the rebuilding of its investment banking operations. We have continued to express concerns with regards to the ability of management to develop a robust risk culture and effective control framework while at the same time trying to re-establish its position in certain market segments.”

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