* Kweku Adoboli convicted of two counts of fraud
* Biggest fraud in British history
* Not guilty of four counts of false accounting
By Katharina Bart
ZURICH, Nov 20 The $2.3 billion fraud by UBS
trader Kweku Adoboli, who was convicted on Tuesday, didn't stop
client money flooding in, but the disbanding of the Swiss bank's
riskier investment banking activities can be laid at its
Adoboli's conviction on two counts of fraud 14 months after
the losses emerged comes shortly after UBS announced it would
slash 10,000 jobs and wind down large, risky parts of its
investment bank, where 32-year-old Aboboli worked.
UBS said there was no direct link between what
insiders call "the UTI" - unauthorised trading incident - and
the partial retreat from fixed income, but the truth is more
A swathe of top executives including former Chief Executive
Oswald Gruebel and investment banking co-head Carsten Kengeter
have resigned, been sacked, or sidelined following the scandal.
UBS, clearly nervous about what Adoboli might say, had up to
a dozen lawyers and public relations people in court every day
of the 10-week trial.
In one of the more dramatic moments, Adoboli gestured
towards them, railing at "the machine" that singled him out for
blame when all he had done, he said, was try too hard to make
the profits the bank wanted.
For many of UBS's investment bankers, the trial took a back
seat to the overhaul announced on Oct. 30. Roughly 4,000 of the
10,000 lay-offs could fall in sales and trading, sources at the
Sergio Ermotti, appointed CEO after Gruebel quit, is leading
a three-year fixed-income retreat to save 3.4 billion Swiss
francs ($3.6 billion), on top of 2 billion identified last year.
"The UTI wasn't part of the restructuring debate, but it did
lay the groundwork in that it's what caused Gruebel to leave,
which paved the way for Ermotti," a UBS banker said.
Ermotti's plan will partly reverse Gruebel's course by
cutting loose businesses that are no longer profitable due to
stricter Swiss capital rules on riskier activities introduced
after the financial crisis.
The trial provided a snapshot of a trading floor culture
where testosterone flowed freely and traders laughed in the face
of risk, which Adoboli's defence said showed that the message
from above was to trade more aggressively.
The court heard that one trader casually asked if Adoboli
was using his "slush account" that day. Another asked: "How many
billions are you short today? That's my leading indicator."
Such material painted the investment bank as the "ugly twin"
to UBS's low-risk private banking unit - the second largest in
the world after Bank of America - which handles the
affairs of wealthy clients.
The private bank had only just recovered from spooked
clients taking out more than 200 billion francs after the
bank's$50 billion in mortgage losses and 2008 government rescue.
The details that emerged from Adoboli's trial couldn't have
helped UBS's branding as trusted advisor to the rich, but this
time clients seemed sanguine; the unit posted robust inflows in
the quarter following the scandal, and secured 7.7 billion
francs in net new money in the most recent quarter.
In July, UBS was named best bank in Switzerland and best
global wealth manager by Euromoney magazine.
ERMOTTI ASCENT PAVES WAY FOR REVAMP
The trial highlights how the private bank ultimately won the
cultural armwrestle with the investment bank.
Alongside the roughly 500 made redundant at the bank after
the trading scandal was exposed, the departure of Gruebel, whose
four-decade career began as a bond trader, marked the first step
in the investment banking revamp.
The appointment of Ermotti, also an investment banker who
spent a large part of his career with Merrill Lynch and
UniCredit, paved the way for far bolder changes.
"This could not have happened had Gruebel still been CEO. It
took a change at the top to look at this with a fresh pair of
eyes and question whether UBS really needs a big investment
bank," a UBS banker said.
When Gruebel was hired in 2009 to revive UBS after the
bailout and settle a messy U.S. crackdown on tax evasion, he
said UBS needed to "trade harder", even as Swiss lawmakers
demanded even stricter capital requirements for its banks than
international rules mandated.
Though he toned down that rhetoric, Gruebel was still a huge
backer of the investment bank until he left last September, UBS
Gruebel declined to comment.
To be sure, UBS retains an investment bank, but focused on
corporate advice and equities, home to the Exchange Traded Funds
desk where Adoboli worked in London. Trading in foreign
currencies and precious metals also survives.
Former investment bank co-head Kengeter remains with UBS,
but sidelined and on borrowed time, tasked with winding down the
discontinued fixed-income activities.
Kengeter spoke to Adoboli on July 12 and said the market was
going to rally, which Adoboli said encouraged him to keep
buying, when he was racking up huge losses in a falling market.
"He was Gruebel's choice to succeed him as CEO. (Former
chairman Kaspar) Villiger was a huge fan, too," said one former
senior insider. "I really liked him and thought he was a smart
guy who could have gone far," but for the trading scandal.
Kengeter is expected by several former and current
colleagues to leave of his own accord soon. Kengeter declined to
UBS's investment bank is returning to the mould of SG
Warburg, a respected British merchant bank absorbed by UBS more
than 15 years ago and where some of the firm's dealmakers
started out. Andrea Orcel, who now heads the investment bank
alone, must walk a tightrope: turn a profit with what remains
while trimming risk and taking a more conservative approach to
the way it finances deals.
"I am sure it has taught them (UBS) a lot about governance,
incentives, controlling traders, how to punish bad behaviour and
how to minimise any kind of collusion meant to cover up these
kinds of cases," said Martin Janssen, professor of finance at
the University of Zurich.
And perhaps how to close for good the door through which
that horse has bolted.