By Giles Broom and Aaron Kirchfeld - Sep 21, 2011 2:24 PM GMT+0700
Oswald Gruebel, chief executive officer of UBS AG (UBSN), may face pressure to cut risk and shrink the investment bank as the board meets in Singapore, less than a week after a $2.3 billion loss from unauthorized trading.
The CEO got a scolding yesterday from the Government of Singapore Investment Corp., the company’s biggest investor, which “expressed disappointment and concern about the lapses and urged UBS to take firm action to restore confidence in the bank,” according to a statement from the sovereign wealth fund after its senior management met with Gruebel.
The opprobrium marks a shift for the 67-year-old Gruebel, brought in 2 1/2 years ago to rebuild Zurich-based UBS after record losses on U.S. subprime mortgage securities led to a state rescue. Gruebel earned the moniker “Saint Ossie” in Switzerland for helping to restore Credit Suisse Group AG (CSGN)’s profits and reputation in his previous CEO role, and for a trading acumen that included spotting the subprime debacle early. While Gruebel’s own position may be at risk, there’s no obvious replacement.
“This is a black eye for Gruebel and the bank,” said Christian Hamann, an analyst at Hamburger Sparkasse who has a “hold” rating on UBS. “On the other hand, he’s done quite a few things well and successfully stabilized the bank, which may have earned him some credit that he hasn’t used up yet.”
Tatiana Togni, a bank spokeswoman, said she wouldn’t comment on “speculation” regarding succession at UBS. Gruebel was unavailable for comment.
‘Normal’ Meeting
Chairman Kaspar Villiger, speaking to reporters in Singapore today, said it will be a “normal” board meeting. When asked whether there has been any pressure from investors following disclosure of the trading loss, he said “thankfully, no.”
UBS rose 1 centime to 10.22 francs by 9:21 a.m. in Swiss trading. The shares declined 33 percent this year, in line with the slump in the 46-company Bloomberg Europe Banks and Financial Services Index.
Gruebel, whose career in finance spans half a century, returned UBS to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank. Still, his two-year effort to rebuild profitability at the investment bank had been undercut by market turmoil and higher capital requirements even before the trading loss.
Review of Loss
The board of Switzerland’s largest bank will review the loss and possible management changes during the two-day meeting, said a person familiar with the matter who declined to be named because the gathering is private. The regular meeting was scheduled before the loss emerged, and coincides with the Singapore Formula One Grand Prix, where the firm will be entertaining clients.
Bilan magazine reported yesterday that Gruebel was asked to leave, citing an unidentified person close to the board of directors. Discussions at the board level are underway concerning Gruebel’s successor, according to Geneva-based Bilan, which didn’t say how it obtained the information or who asked him to go.
Plans to Stay
The loss resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said in a statement.
The company said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk- management units in the industry, raised questions about the bank’s controls.
Britain’s Financial Services Authority and its Swiss counterpart said they would investigate the trading losses.
Kweku Adoboli, a 31-year-old UBS trader, was charged with fraud and false accounting by London police on Sept. 16, the day after UBS first announced the trading loss. He didn’t enter a plea and his law firm, Kingsley Napley, declined to comment.
Can’t Blame CEO
Gruebel told Swiss newspaper Der Sonntag in an interview published Sept. 18 that he doesn’t plan to resign because of the loss, adding that when “someone acts with criminal intent, you can’t do anything.” He told Swiss TV in a separate interview that he’s ultimately responsible and will have to “take the consequences.”
Lutz Roehmeyer, who helps manage about $14 billion at Landesbank Berlin Investment, including UBS shares, said it will probably be up to Gruebel whether or not to resign. If a trader knows the rules and how to evade them, it’s very difficult to prevent him from doing so, he said.
“The CEO is the last person who can do something about that,” Roehmeyer said. “If someone robs a UBS branch or steals gold from UBS’s safe, you can’t blame the CEO for that. The scandal has nothing to do with his performance.”
The events throw into relief the lack of a succession plan at UBS, analysts said. Gruebel, pulled out of retirement to take on the CEO role, turns 68 in November. Villiger, 70, is scheduled to step down in 2013, replaced by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance that Carsten Kengeter, the 44-year-old head of the investment bank, will ascend to the top job.
‘Under Pressure’
“Kengeter is probably more under pressure than the CEO because he’s responsible for the investment bank,” said Roehmeyer. “He’s closer to the trading loss.”
Sergio Ermotti, UBS’s CEO of Europe, the Middle East and Africa, may be a potential successor, analysts said. The 51- year-old joined in April, after running the investment bank at UniCredit SpA, Italy’s largest lender.
Gruebel told staff in a memo on Sept. 18 that he was “shocked and disappointed” by the unauthorized trading, describing the events as a setback to UBS’s reputation and its effort to build up capital. He said the loss won’t affect UBS’s capital base, and the risk of someone violating the bank’s controls “always exists.”
‘All It Takes’
“I and the rest of the firm’s management are fully focused on thoroughly investigating this issue, and will do all it takes to determine how this happened and what we need to do to ensure that it does not recur,” Gruebel said in the memo. “Ultimately, the buck stops with me.”
David Sidwell, the senior independent director on UBS’s board and a former chief financial officer of Morgan Stanley, will lead a three-person board committee investigating the trading loss and the bank’s controls, UBS said.
For Gruebel, the outcome of the investigations into the matter may affect his legacy as the only person to have served as CEO of both of Switzerland’s biggest banks.
Born in the eastern part of Germany during World War II, he was orphaned before his first birthday. He crossed into West Germany with his grandmother on foot at the age of 10 to live with relatives. On the advice of a grandfather, he abandoned an ambition to study engineering and joined Deutsche Bank AG in 1961 as a 17-year-old trainee straight out of school.
‘Career Risk’
He moved to Credit Suisse White Weld Ltd. as a Eurobond trader in 1970. By 1991 he had become Credit Suisse’s head of global trading. Under Gruebel’s leadership as CEO, Credit Suisse started cutting its exposure to subprime mortgage bonds in 2006, when UBS was still buying them, according to disclosures from both companies. UBS eventually booked losses and writedowns of more than $57 billion, data compiled by Bloomberg show. Gruebel joined as UBS’s third CEO in less than two years.
“It was obviously quite a career risk for Gruebel to come back in 2009 and take over the UBS helm,” said Emily Adderson, a London-based fund manager at Henderson Global Investors, which oversees $117 billion. “You can understand his motivation to continue the job he started. Of course, you want to have the vote of confidence from the board that the right plan is going to be implemented going forward.”
To contact the reporters on this story: Giles Broom in Geneva at gbroom@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net;
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