UBS 2 Billion Loss Analysis: Overview Of The Firm, Summary Of The Case

UBS 2 Billion loss analysis
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UBS 2 Billion loss analysis
Introduction
The UBS is a global financial organization which provides asset management, wealth management and investment banking services for companies in both the private and public arena. The company also offers investment and wealth management services to the retail sector. The name of the company was initially an acronym of the Union Bank of Switzerland, a name it lost following its amalgamation with Swiss Bank Corporation in the year 1998. Today, UBS is the largest financial institution in Switzerland with a investment of about 2.8 trillion Swiss Francs. In addition, the bank has branches in over 50 countries and an employee base of about 59, 387 as of 2016. In 2011, the bank underwent a loss of 2 billion dollars caused by a rogue trader identified as director in the institution’s Global Synthetic Equities Trading branch (Shefrin, 2012). It only emerged later that the top management of the institution had failed to act upon information provided by the company’s computer system. While the rogue trader by the name Kweku Adobili was arrested and charged for fraud charges, the loss supposedly a huge loss for the company with its share price dipping with about 10.8 percent as compared with the stock price of other banks which rose with between 3 and 6 percent.
Overview of the Firm
The UBS Company has a history of 15 years with operations in over 50 countries spread across five continents. The company prides itself with a vast experience in managing investment portfolios of high end individuals. The company’s global strategy is focused on strengthening its wealth management branch while identifying and integrating synergies in the investment bank as well as Asset Management business units with the aim delivering outstanding solutions to its clientele base. The business wealth management approach is founded on the trust relationship of its financial advisors as s well as its customers. The company’s wealth management team combines insights gathered through global research professionals and local skills to offer clients access to superb investment decisions. Informed by strong investment process, the chief investment office insights assist customers to make better good investment decisions in a swift global market place.
According to the company, its global solutions are driven by the needs of the customers. It provides a wide array of solutions both from the inside and outside the company and regarding a wide variety of products and services. Today, the company remains strong with long-term credit ratings standing at 13.8 percent. The company’s capital position is also strong with its common equity tier 1 ratio remaining high among global banks. UBS is registered as a joint company under Swiss laws and its shares are listed at New York Stock Exchange and the SIX Swiss exchange. It can be noted that despite the bank having its origins in Switzerland, its main operations are in United States. The structure of the company includes a total of five divisions including wealth management, asset management, investment bank, personal and corporate banking and wealth management Americas (Shefrin, 2012). The corporate center is charged with overseeing the control functions, including finance, technology, legal issues and risk control. The division also oversees logistics including human resources, operations, communication and information and physical security. Major competing banks include Credit Suisse, Migros Bank, Royal Bank of Scotland and Citigroup.
Summary of the Case
A day before he was arrested, Adoboli Kweku had informed his boss that there was a loss of 2 billion dollars due to trades that had forward settlement dates. This discovery was first discovered by controllers who were making a routine check. Once the management had been informed of the anomalies, it informed the Switzerland financial regulator and the British financial services authority. Back in the office , task force was formed to close any open position held by Adoboli. The company would later inform City of London policy who would later arrest Adoboli. The decision to close open positions held by Adoboli was made to avoid creating a panic in the market which would undoubtedly increase losses for the company and the industry in general. At the time of the scandal, Adoboli was the director of exchange traded funds (ETFs) which are a type of Delta 1 products. These are known as underlying securities that traders track in the market and enable holders to gain exposure to various asset classes. Confirmation of trades with forward settlement dates is not usually which could have helped Adobili to use EFTs to cover his fake hedges.
On September 15th 2011, police arrested Adoboli on charges of fraud in relation to the loss of 2 billion American dollars. This was connected to unauthorized trading at the investment bank. The Swiss financial regulator (FINMA) through one of its spokespersons referred to the case as one of the worst in the history of the sector. While the loss of the money was seen as manageable to the bank, it had the potential to lead to a net loss in the following quarter. As a result of the incident, the CEO of the company resigned to take responsibility of the unauthorized trading. The company was thrown into disarray following the departure of the CEO with the co-heads of the Global Equities resigning ten days later.
The company reported that it did not lose clients’ funds though its reputation suffered significant damage. In addition, the company hoped to retrench about 3,500 hundred workers as a way of saving and before the scandal. In November the same year, the company announced plans to cut back half of its risk-weighted assets in its investment bank division over a period of five years. This move was aimed at reducing risk exposure following the scandal. The company did announce that it had patched the loopholes that facilitated the scandal though it was reported that the UK’s financial regulator had fined the fine 47.6 million dollars for control and system failings. An senior manager, John Hughes was allegedly aware of Adoboli’s illegal trading and use of profit pool or the umbrella to hide losses incurred. As a consequence, the manager was banned for life from working in the financial service sector.
Analysis
There are a number of possibilities which could have helped escalate the UBS problem. First, Adoboli may have made a mistake in buying Swiss Francs to a hedge position instead of selling them. This would make him vulnerable to changes in the currency. For example, a move by the National bank to intervene in the market by lowering the value of the currency in relation to the Euro could have facilitated huge losses for Adoboli. The loss could also have originated from a trade on behalf of a customer. In such a case UBS would have assumed the opposite side of trade. However, concealing the real position could have misled the bank which would in turn allow an excessive growth of its position. Equally, the bank could also have opted to maintain its position following its trading for a customer which would eventually increase the risk of losing money. Yet another possibility, the losses incurred by Adoboli and the bank in general could be tied to volatility of European stocks. The uncertainty created by the Greece financial crisis was instrumental in creating panic in the stock market. It is also possible that Adoboli choose the wrong time to bet of the stock index and used an EFT to trade. The final possibility would be that Adoboli was booking trades which instead of been flagged were reversed with fictitious trade to avoid detection. Real trade positions could have been hedged against fictitious ones especially if the settlement dates were forward. Such trades would not have failed and would be difficult for the company to detect. Either way, the organization failed to detect these mistakes which culminated to financial loss and reputational damage.
The UBS scandal and the subsequent sentencing of Adoboli highlights the problem of unauthorized trading and the costs that banks incur. Besides incurring financial loss, the reputation of a bank is injured as a result of rouge trading. Most banks end up becoming complacent as time moves and there is no incident. In addition to these, there is a misperception that fraud incidents such as the one experienced at UBS are different (Thomasson & Taylor, 2011). As such, banks fail to learn from these scandals to bolster their activities. Whilst the risk of experiencing a scandal is often low, the effect is significant in terms of reputation and financial losses.
As highlighted by the UBS scandal, there are a number of areas that financial institutions need to consider and address appropriately. If addressed effectively, these areas can help to reduce risk of suffering a scandal. One of the lessons from the UBS scandal is that there is lack of strong supervision of investment traders especially at the local level. Over the years, investment banks have maintained global trading books with supervision been done in a different country or time zone. In order to reduce the risk of scandals, banks need to rethink this approach and bring-in strong local supervision if not altering the reporting lines. A local supervisor will have a better chance with understanding the local market, identify behavioral changes and be in a better position to monitor intraday trading (KPMG 2012). The supervisor capabilities and qualities determine the extent to which he or she will be able to supervise trading activities.
Another area that organizations need to improve on is that of organizational culture. There is a general view that almost all past incidences involve aggressive male trading activities. Whilst this notion may be true, it overlooks other factors. For example, in the case UBS, the Adoboli was evidently allowed to violate trading mandate as well as control standards without repercussions. This emboldened him to continue and increase the amount ...