CORRECTED-COLUMN-UBS scandal could kill its investment bank: Mullin

(Corrects reason for Moody's downgrade of Societe Generale in first paragraph)

LONDON, Sept 16 (Reuters) - What a week it's been. In the past few days, we've been overrun with big news events. We had Societe Generale and Credit Agricole downgraded by Moody's due to concerns over reduced systemic support and Greece exposure respectively; false (potentially malicious) rumours that BNP Paribas was unable to access dollar funding; Sarko-Merkel causing a bit of a rally but not convincing anyone really, saying they stood squarely behind Greece; and JP Morgan's CEO Jes Staley saying the bank's Q3 markets revenues would be down around 30 percent and that investment banking fees would be around $1 billion, around a third lower than Q2.

We had the final report from John Vickers' UK Independent Commission on Banking suggesting UK banks' retail operations should be ringfenced from their wholesale operations and that primary loss-absorbing capital should be hiked way above Basel III standards to 17 percent-20 percent (although not until 2019).

Friday sees the meeting of European finance ministers in Poland to discuss - yet again - how to solve the debt crisis, this time with a potentially uncomfortable guest appearance from US Treasury Secretary Timothy Geithner who will likely lambast his counterparts' inability to get their act together and suggest leveraging the EFSF into a TALF look-alike.

And then to cap it all, UBS trader Kweku Adoboli was arrested after a $2 billion trading loss on the bank's Delta One desk. Boy, I'm exhausted just listing the issues.

The UBS saga is a grotesque embarrassment, not just for UBS but for the entire investment banking industry. My colleague John Manley once described my column as "the defence, occasionally spittle-flecked, of the global investment banking industry". That's a very fair description. I've found myself spending the past year unashamedly (and occasionally aggressively) defending what has arguably become one of the world's least popular industries against what I've considered to be an unwarranted, unfair, incorrect or misguided assault from a baying crowd that has invariably had politicians in its ranks.

In the wake of the startling revelations at UBS, though, I find myself almost stunned into silence. If Adoboli is charged with fraud, there are so many questions. How on earth was he able to get away with it? Why didn't the bank's monitoring systems pick this up? Did he act alone? If so, how did his line managers or desk colleagues not sense anything was wrong? How discomforting that some reports claim the bank only found out because Adoboli himself told managers that its risk systems hadn't been triggered. And wasn't UBS supposed to have shut down prop trading?

Was it out-and-out fraud, or is there a flaw in UBS's risk management architecture? If so, is that loophole, flaw or bug confined to UBS or is it industry wide? Why didn't regulatory reporting pick up anything untoward? Indeed, it's unclear which regulator (UK or Swiss) had primary responsibility for these activities. This aspect will raise important issues around regulatory control and responsibility in a deeply interlocked and interconnected global financial services industry.

BOTTOM OF THE CLASS

Of course, this had to happen to a bank whose investment banking performance had already been bottom-of-class relative to peers. UBS has all the hallmarks of a once mighty global powerhouse fast becoming a boutique, a firm that has got caught up in almost every industry mis-step, and one which vies with Citigroup as the firm to come out worst from the 2008-2009 financial crisis, having recorded losses of over $50 billion and having had to be rescued by the Swiss authorities.

UBS saw an almost unbroken line of senior departures from its investment bank earlier this year. Ironically, the exodus had slowed recently and there were signs that the bank was starting to refocus on deal-making as opposed to litigation or internal strife. That said, the 3,500 job cuts announced recently had badly dented morale. This latest episode is likely to get that revolving door spinning again, as the Q3 loss caused by rogue trading and another likely lousy bonus pool will be the last straw for bankers and traders.

So what happens now? Well that will depend on exactly what happened. But regardless of the details, Carsten Kengeter, CEO of the investment bank, has to go. So does group CEO Ossie Gruebel. Both had gone to great lengths to extol the virtues of their new approach to operational risk management, and had gone to great expense to install new systems and upgrade internal processes and procedures. Their positions are untenable.

Swiss regulators, who were growing uneasy anyway at the bank's attempts to rebuild investment banking, may force UBS to spin out the investment bank. They may force a shut-down of swathes of its trading businesses - which would be tantamount to a closure of the unit altogether - and convert UBS into a wealth and asset manager.

The investment bank accounted for 36.3 percent of total operating income of 7.17 billion Swiss francs in Q2, 2011. The rest is in effect wealth management. Divisionally, UBS breaks down its reporting into wealth management and Swiss Bank (39.6 percent of operating income); wealth management Americas (17.9 percent), and global asset management (6.2 percent).

Closure of the investment bank potentially looks drastic, but given regulatory and shareholder concerns, and ahead of another exodus of talent and more internal turmoil, it may be seen as the most appropriate response.

(Editing by Joel Dimmock)