COMMENT: UBS makes correct call - five years too late

Thu Nov 1, 2012 9:29am EDT

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LONDON, Nov 1 (IFR) - The way UBS began to cut as many as 10,000 jobs, which will leave just a skeleton fixed income business, shocked even the most hardened bankers. One described the manner of the cull as "the most brutal" he's ever seen. Yet he could not quibble with the decision itself.

UBS's investment bank, and especially its fixed income business, has been horribly mismanaged for years. Decisions such as the one in 2005 to establish an in-house hedge fund, Dillon Read Capital Management, and transfer its best prop traders there, thus alienating those that stayed within the investment bank, only then to wind it down two years later, pointed to a firm that had no idea what it was trying to do.

As did UBS's hopelessly misguided exposures in CDOs of ABS, where the bank failed to properly assess the risk of the underlying collateral. In that it was not alone, but the scale of its losses should arguably have led to the decision taken this week being taken five years ago, when it was clear that UBS was ill-equipped to be a force in the fixed income markets.

Wind back to 2009, and former Group CEO, Ossie Gruebel, had another chance to recalibrate the bank after a raft of departures. Despite the clamour from its Swiss investor base to concentrate on its key areas, Gruebel brought in Carsten Kengeter to restart fixed income. The hire of former Deutsche stalwart Rajiv Misra to run credit was a statement of intent.

Now Kengeter is charged with running down those once-profitable but capital-intensive fixed income positions.

No one at UBS should be that surprised by the radical move - Sergio Ermotti virtually laid out the plan soon after becoming permanent group chief executive a year ago.

The cuts could free up about CHF10bn of capital and the firm should be well positioned for the post-Basel III landscape.

UBS can now focus on what have always been its core strengths - wealth management, FX, advisory and equities - though the firm's operational and risk management practices that were once so highly regarded need to shape up.

And what of debt advisory, where the fees have been driving investment banking revenues for much of the year? Aside from shuttering supranational, sovereign and agencies, the debt capital markets business remains largely intact. Given how flow fixed income trading has dried up in 2012, is the firm really taking such a bold step by assuming it can still win bond mandates without a big sales and trading presence?

Rival firms won't be gloating at UBS's misfortunes. Cost-income ratios are out of whack at many European investment banks, and plenty need to raise capital - or cut assets. Many more job losses and compensation cuts are to come. (Reporting by Sudip Roy; editing by Alex Chambers, Philip Wright, Julian Baker)

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