UBS report on writedowns shows how not to run a bank
ZURICH (Reuters) - Swiss bank UBS AG released on Monday its 'Shareholder Report on UBS Writedowns', a document that might be better named 'How Not to Run a Bank'.
The report is part of a forensic exercise ordered by Swiss banking regulator EBK in the wake of UBS' $37 billion in writedowns on the subprime crisis -- the biggest by any bank.
What it reveals is widespread failure of some of the most basic controls, affecting numerous levels of management and in numerous departments, as UBS pursued a breakneck expansion plan into investment banking in breach of clear warning signs.
The language used pulls no punches, listing errors and weaknesses one by one, and offering the following self-indictments:
--"Absence of risk management"
--"Fragmented approval structure"
--"Potential structuring/trading conflict"
--"Lack of reaction to changing market"
--"Lack of monitoring/visibility"
"There are some damning criticisms about UBS management," wrote Helvea analyst Peter Thorne in a note to clients, drawing particular attention to parts that talked of revenue maximization regardless of risk.
The conclusion most easily drawn from the complicated and highly technical report is that UBS needs to overhaul its risk management and operating culture from top to bottom.
The report also underscores the need for stricter banking regulation where the risks to individual investors or even the entire economy so disproportionately outweigh potential rewards for a handful of bankers and proprietary traders.
UBS is the world's largest wealth manager, charged with protecting the fortunes of rich people in good times and bad.
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Analysts said some of the most disturbing passages relate to UBS' apparent belief then that it was immune to the same problems that were facing the broader market.
"The various parties involved with the portfolio were aware of the content of the portfolio and the deterioration in the subprime markets generally. However, those persons seem to have believed that there would not be an impact on the highly rated ABS in the portfolio," the report said.
The report also offers a clear warning sign to regulators wondering whether their attempts to forestall a systemic collapse through massive liquidity injections would pose a moral hazard, or entice others into more risk-taking.
UBS admits as much, saying specifically that its traders abandoned caution, knowing that they could always exchange their assets against government bonds as collateral at a central bank.
"Further comfort was taken from the continued acceptance of the respective assets as eligible collateral with the relevant Central Banks," UBS says in the report.
In another passage, the bank -- previously regarded as one of the best-run banks in the world -- admits that even when clear and present dangers were identified, its risk controlling operations did not limit them.
"Throughout 2006 and until Q3 2007, there were no aggregate notional limits on the sum of the CDO warehouse pipeline and retained CDO pipeline positions -- although warehouse collateral was identified as one of the main sources of market risk," the report says.
The report offers clues too as to where regulators may crack down next.
Already, the Basel Committee on Banking Supervision has said it was preparing reforms to global standards that will close loopholes and make risk-taking more expensive.
In a section entitled "Incomplete risk control methodologies," UBS underscores how complicated formulae such as Value At Risk, or VAR, failed to prevent financial engineers from modifying methodologies in order pack even more risk into existing stress limits.
The report also provides ample fodder for critics at Wednesday's AGM, likely to be attended by activist investor group Olivant, and at which the bank will be asking its investors for another 15 billion Swiss francs in new capital.
Olivant, alongside other groups such as Ethos and Profond, already has UBS in its sights and has launched a vociferous campaign for reforms to the bank's management and to its business structure.
(Reporting by Thomas Atkins; Editing by Andrew Callus and Jason Neely)
