UBS explains huge sub-prime losses in 50-page report

Jerry Hansin

21 April 2008

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UBS explains huge sub-prime losses in 50-page report
Posted: 21 April 2008 1848 hrs

ZURICH: Switzerland’s biggest bank UBS said on Monday that weak risk control and a pay structure that invited risky deals were among key factors leading to its massive sub-prime-related losses.

A 50-page report to shareholders, a summary of a document the bank submitted earlier to the Federal Banking Commission, set out the causes leading to write-downs of over 37 billion dollars (23.4 billion euros) that made UBS the world’s worst-hit by the sub-prime crisis.

UBS cited the failure by its market risk control team to sufficiently “challenge” the desk dealing with collateral-debt obligations (CDOs) even when its sub-prime holdings were growing significantly.

In addition, it said that its compensation structure for employees provided “insufficient incentives to protect the UBS franchise long-term”.

The report said UBS’s review saw no “fundamental flaw in relation to its objectives”.

But it added that “on hindsight, UBS believes that implementation of these particular growth initiatives as well as the level of challenge by Group and Investment Banking Senior Management on these initiatives was a contributing factor to the build-up of UBS’s sub-prime positions which subsequently incurred losses”.

UBS in February posted full-year losses of 4.4 billion Swiss francs for 2007 as write-downs reached 18.7 billion dollars.

In April, it issued a profit warning for the first quarter, saying that additional write-downs of about 19 billion dollars were expected.

In the report, which addresses the bank’s positions and losses as of December 31, 2007, UBS said that its market risk control unit placed an over reliance on credit ratings of sub-prime positions.

The unit failed to review the quality of the portfolio even when questions were being raised about the sub-prime sector, said the bank.

In addition, the risk controllers put up insufficient challenge to the CDO desk even when it sought “significant limit increases” for its sub-prime holdings.

The bank also saw as a fault its pay structure, saying that it gave incentives to traders to pursue increased pay through risky trading that generally provided higher rates of return.

It said that bonus payments for successful and senior investment bankers, including those in the businesses holding sub-prime positions were significant.

“Essentially, bonuses were measured against gross revenue after personnel costs, with no formal account taken of the quality or sustainability of those earnings,” it said.

The bank said it would provide a report to the banking commission on what action is has taken, and that the details will in turn be communicated to its shareholders.

UBS will hold its annual general meeting on Wednesday, when shareholders are expected to vote on whether or not to accept a second capital hike proposal tabled by the management.

Singapore’s GIC, which in December said it would inject 11 billion Swiss francs into UBS in the first capital hike, reiterated on Monday its long-term faith in the investment.

“We regard our investments in UBS and Citicorp as long-term investments which will give us good returns when markets stabilise and economic conditions return to normal levels,” GIC deputy chairman and executive director Tony Tan said.

- AFP/so

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