UBS alleges rogue trader cost it $2 billion

ZURICH: Swiss banking giant UBS said Thursday it had lost $2.0 billion (1.46 billion euros) through unauthorised trading, after British police arrested a man suspected of committing the massive fraud.

The man, arrested before dawn in central London on "suspicion of fraud by abuse of position," is in custody, City of London police said.

British media named him as Kweku Adoboli, a trader in UBS' exchange traded funds division, although neither the bank nor the police identified the suspect.

Two minutes before trading began on the Swiss stock exchange, UBS issued a statement that it "has discovered a loss due to unauthorised trading by a trader in its Investment Bank."

The announcement is a severe blow to the bank's retrieved reputation after the financial crisis which tarnished the standing of Swiss banking, as well as to its profit outlook and puts a question mark over the investment banking division.

"The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion," said the bank, adding that it may also be forced to report a third quarter loss due to the unauthorised trade.

Within hours of the UBS announcement, ratings agency Moody's said it was considering lowering the credit rating on the Swiss banking giant.

Moody's said its review will focus on "ongoing weaknesses in the (UBS) group's risk management and controls that have become evident again."

While the losses may be manageable, they "call into question the group's ability to successfully complete the rebuilding of its investment banking operations," the rating agency said.

The news of the losses saw UBS shares plunge. By the close of trading Thursday they were down by 10.80 percent at 9.75 francs.

The bank assured clients however that their positions were not affected.

When contacted, UBS would not give further details.

But in a statement to its employees, the bank's management said it had uncovered the fraud the previous day.

"While this news is regrettable, the fundamental strength of our company would not be affected," it said.

It called on its workforce to "concentrate on the clients", saying it "counts to have their support in these uncertain times."

The bank added that it would work tightly with its risk management team and management to find out how the rogue trading could have occurred.

"It's a sad story for UBS, but also for a bank in Switzerland as a whole. Everyone is wondering how this could happen. What kinds of risk system did UBS have?" noted Claude Zehnder, chief analyst at the Zuercher Kantonalbank.

UBS has been fighting to restore its reputation after losing colossal sums in US subprime loans in 2007-2008 and the ensuing global economic crisis.

The bank had to be bailed out by the state, while clients exited en masse amid fears that it would go under.

In 2008 and 2009, the bank was also embroiled in a serious tax evasion spat with the United States.

It was forced to hand over 300 client names and pay a 780-million-dollar fine in a first case, before a second wider case in which it finally agreed to hand over data on 4,450 American clients.

The rogue trading incident could also force UBS to "think seriously about exiting investment banking as a whole or cutting it down substantially in size," noted Zehnder, pointing out that the unit was already one of the worst performers of the bank in recent years.

Sarasin Bank analyst Rainer Skierka also said that while the bank could mop up the loss using its capital, "the damage to its reputation will be much more severe."

In 2008, French bank Societe Generale uncovered rogue trading by one of its former employees Jerome Kerviel, whose unauthorised trades lost the bank 4.9 billion euros ($7.1 billion at that time).

Kerviel was later sentenced to five years in jail with two years suspended, and ordered to pay back the 4.9 billion euros, although the French bank said it would spare the trader from reimbursing the full compensation.

Copyright AFP (Agence France-Presse), 2011