The fall of UBS: the bank where Royal Dutch Shell Chief Financial Officer Peter Voser is a director

The Sunday Times: The fall of UBS

After owning up to £18billion in writedowns, UBS boss Marcel Ospel last week fell on his sword

By Iain Dey
Sunday April 6, 2008

Marcel Ospel picked up the phone on Monday, March 17, with bad news for his London-based head of equities, John Wall. The UBS chairman had spent the weekend in board meetings. Although the financial markets were focused on the imminent rescue of the American investment bank Bear Stearns, UBS had uncovered problems of its own.

A tortuous analysis of the bank’s remaining exposures to sub-prime mortgages in America had confirmed that Switzerland’s biggest bank would have to launch an enormous rights issue to shore up its balance sheet.

Ospel told Wall to begin rallying the troops. Within 48 hours he and his team had their backers in place. Top of the list was JP Morgan Chase, which had just completed its Bear Stearns bailout. It was joined by Morgan Stanley, Goldman Sachs and BNP Paribas.

The same four banks had helped Société Générale raise cash in the wake of the rogue trader scandal weeks earlier. They were the first that UBS approached in its time of need.

Two days later, on Good Friday, the banks were pulled together for a series of conference calls with the UBS senior management team, and over the following week they fine-tuned the details on what would become a £7.4 billion cash call.

Within the inner sanctum of Wall Street’s ruling elite, it was an open secret that UBS was about to announce huge writedowns and a new fundraising exercise.

“A lot of the Swiss establishment had been calling for Marcel’s head for some time,” said one UBS executive. “When the size of the fundraising became apparent there was no way he could stay on.”

By the time Ospel walked into the boardroom of the bank’s Zurich headquarters last Monday night, he had made up his mind. He would have to stand down – his dream of turning a Swiss private bank into a global financial powerhouse had turned to dust.

On Friday an old adversary emerged with a plan to undo Ospel’s work. Rebel shareholder Luqman Arnold, who was forced out of UBS in 2001 following a row with Ospel, called for the bank to sell its asset management business, along with its Brazilian and Australasian operations. The former chief executive of the British mortgage bank Abbey – and now head of the investment vehicle Olivant – also demanded UBS hive off its investment bank from its private banking operations. Ospel’s humiliation was complete.

Ospel had been one of the great survivors of the global credit crisis. He clung to office while Chuck Prince fell on his sword at Citigroup, and Stan O’Neal was forced out at Merrill Lynch.

He became UBS chief executive after leading the reverse takeover of the old Union Bank of Switzerland by the Swiss Bank Corporation (SBC) in 1998. UBS had been laid low by the collapse of Long-Term Capital Management, and long-running legal battles related to tracing assets held by victims of the holocaust.

In his time at SBC, Ospel did a string of deals, buying British merchant bank SG Warburg, then the US-based derivatives business O’Connor. He later added US brokers Paine Webber and Dillon Read.

The old UBS had bought Philips & Drew, among other things. The combined bank would conquer the world, according to Ospel.

“Marcel built UBS from nothing,” says one of his former key lieutenants. “We were the first European bank to really take on Wall Street on their own patch. That was all down to Marcel.” OSPEL, who came from a relatively poor family in Basel and worked his way up without a university degree, became chairman in 2001 – Luqman Arnold was chief executive. Ospel had not been long in the chairman’s seat when Swissair, the Swiss national airline, collapsed. He pledged the bank’s support to a rescue without involving the board. A furious Arnold attempted to stand up to Ospel. In the end it was Arnold who was forced out.

Critics of Arnold claim that his attack on Ospel’s legacy is a straightforward act of revenge.

“Luqman didn’t realise that while he was notionally the chief executive, he wasn’t in charge of anything really,” says a former UBS executive who remains close to Ospel. “Marcel ran that bank.”

Another former UBS executive said: “Marcel was never someone to jump around or raise his voice. But he’s all about ego. He always wanted to be bigger than the Americans. That seems to be why they’ve ended up where they are today.”

Ospel’s aim to conquer Wall Street took shape with the appointment of John Costas as chief executive of investment banking. Costas, who had been

poached from arch-rival Credit Suisse, was given licence to splash out on big-name investment bankers.

Costas and his team developed the strategy of investing in mortgage-backed securities. By June 2005 he committed himself to the project full-time, stepping down as investment banking head to set up Dillon Read Capital Management (DRCM), an internal hedge fund. The traders left to run the UBS book followed their former leader into the sub-prime bets.

“Ospel is the best banker in Switzerland by a mile,” said one UBS executive in London. “But he was still the guy who sat on the risk committee while everything was ploughed into US mortgages. At its peak our balance sheet was $2.3 trillion (£1.1 trillion). It got to a point where $400 billion of that was held in US mortgages. John Costas made those decisions and Ospel let him.”

Donald Marron, former chairman of UBS America, said he has been “surprised at the breadth of the problem” the sub-prime crisis had triggered.

Marron, now chairman of venture-capital firm Lightyear Capital, would not comment specifically on his former firm’s woes but said credit standards had been lowered across the board “not just in mortgages” and that “risk was not repriced to account for this”.

“Banks went from being long-term lenders to packag-ers. That’s obviously a very different dynamic. It’s not that people didn’t figure out that there were issues, it’s just that once they did there was no liquidity in the market,” he said.

Losses in DRCM began to emerge a year ago. By last May it was closed down after published losses hit £190m. Costas left UBS, but it was too late to get out of the positions.

A slew of top executives followed Costas out of UBS. Eventually, Peter Wuffli, the UBS chief executive, was fired. Ospel, however, stayed put – until last week.

A $3 BILLION fundraising announced last week by Lehman Brothers served as a reminder that UBS is not the only bank in trouble. That was followed by a further $4 billion of sub-prime writedowns by Deutsche Bank.

Merrill Lynch is expected to announce more writedowns with its upcoming results. Expectations are mounting that Citi’s new boss Vikram Pandit is poised to go cap in hand to sovereign wealth funds for another injection of capital.

“Since the start of the year, particularly in March, there has been further deterioration in asset quality,” said Jon Peace, an investment-banking analyst at Lehman Brothers. “Citi and Merrill have been heavily involved in what are now recognised as the most problematic types of investment. They will have to take further marks against those assets, which will lead to further writedowns.”

The pain has not been confined to UBS’s senior staff, who received 80% of their pay last year in shares. GIC, the investment arm of the Singapore government, is sitting on paper losses of about £2.4 billion on its £6.5 billion bailout of the bank late last year. The fund has also pumped money into Citi’s $12.5 billion fundraising earlier this year.

Several other sovereign wealth funds have also had their fingers burnt on Wall Street. The Abu Dhabi Investment Authority is nursing paper losses of close to £1 billion from the capital injection it gave to Citi in November.

The Kuwait Investment Authority, Korea Investment Corporation and Mizuho Corporate Bank are estimated to have combined losses of around £450m from their January capital injection into Merrill Lynch.

China Development Bank and Temasek, which bought into Barclays to support the UK bank’s attempted bid for ABN Amro, have made paper losses of about £900m on their investment.

In spite of the losses, sovereign wealth funds are likely to be prepared to shell out again. If the global banking system is to get back on its feet, new capital is likely to be needed and the sovereign wealth funds are the only investors with serious cash in their coffers.

Until and unless they do, the global banking nightmare seems far from over.

IT’S EVERYONE’S PROBLEM

WHEN the world’s major investment banks run into trouble, the man in the street can often continue to live his life unhindered.

The credit crisis is hitting so hard and so deep, though, that almost everyone is now affected – many because of mortgage rates.

“A lot of people thought this was just a banking crisis when it started out,” said Stephen Andrews, sector analyst at UBS.

“There is growing evidence that the pace of transmission from the banking sector to the real economy is increasing, most prominently through mortgage rates.”

Veteran mortgage experts said that the chaos engulfing the market was unprecedented.

There were more than 13,000 mortgage products on offer to UK consumers a year ago, according to data from Moneyfacts. Now there are fewer than 3,000, with the number falling daily.

The Bank of England’s credit conditions survey indicated that 42.5% of British lenders expected to cut the availability of credit to consumers within the next three months.

Losses caused by sub-prime investments in the US have had a direct impact on the amount of money available in the financial system to lend to British consumers.

“This crisis is very different from what we’ve seen before,” said the head of one big British mortgage lender.

“If you go back to the housing-market problems in 1989, that came about because we had 4m unemployed and interest rates touching 15%. This time it’s all about the fact that the banks have much more limited access to funding.”

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3688439.ece

Amended headline by John Donovan of www.royaldutchshellplc.com

 

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