UBS raises rogue equity trade losses to $2.3 billion (Reuters)

ZURICH (Reuters) – Swiss bank UBS increased the amount it said it had lost on rogue equity trades to $2.3 billion on Sunday and Chief Executive Oswald Gruebel said the alleged fraud would have consequences for strategy and possibly also for himself.

"It is obvious that these incidents will have an influence on the strategy of the investment bank," a visibly chastened Gruebel told Swiss television, adding that the firm would present a new strategy for its investment bank soon.

"I will bear all the consequences of the incident. They will be announced as soon as we put them in practice," he said.

UBS stunned markets on Thursday when it announced unauthorised trades had lost it some $2 billion. London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

UBS said in a statement on Sunday the trader concealed "unauthorised speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months" by creating fictitious hedging positions in internal systems.

"The loss arising from this matter is $2.3 billion. As previously stated, no client positions were affected," it said.

Global stock markets have been extremely volatile in recent months, plunging on concerns over euro zone and U.S. debt crises and then rebounding on hopes for their resolution.

BUCK STOPS WITH GRUEBEL?

The loss is a disaster for the reputation of Switzerland's biggest bank, which had just started to recover after it almost collapsed during the financial crisis and faced a damaging U.S. investigation into aiding wealthy Americans to dodge taxes.

"Loss even more. Reads like they're making excuses," Helvea analyst Peter Thorne said of the UBS statement in an e-mail.

The new scandal has prompted calls for UBS's top managers to step down and for its investment bank to be split into a separate unit from its core wealth management business.

Chris Wheeler, bank analyst at Mediobanca, said there would be pressure on UBS to address the investment bank fast.

"That had been planned anyway for the investor day on November 17 and there may be pressure on them to accelerate that."

Gruebel, who was brought out of retirement in 2009 to turn the bank around, was quoted in a newspaper on Sunday as saying he was not considering quitting over the crisis, but said it was up to the board to decide.

In a memo to staff on Sunday, he said: "Ultimately, the buck stops with me. I and the rest of senior management are responsible for dealing with wrongdoing."

Swiss newspapers quoted unnamed insiders as saying the UBS board and important shareholders such as the Singapore sovereign wealth fund still backed Gruebel, with immediate changes the last thing the bank needs and an obvious successor lacking.

CONFIDENCE, SECURITY, DISCRETION?

The bank, whose three keys logo symbolise "confidence, security, discretion," has for now pulled its "We will not rest" global advertising campaign that was designed by advertising agency Publicis to try to rebuild its image.

Meanwhile, UBS client advisers have been writing to customers to reassure them of the underlying financial strength of the bank despite the trading loss, a spokesman said.

"That we now suffer this setback at this point in our efforts to improve our reputation is very disappointing. This incident also sets us back somewhat in our capital-building efforts," Gruebel said in his memo to staff.

"However, I wish to remind you that our fundamental strengths as a firm remain intact... we remain one of the best-capitalised banks in the industry.

UBS said its board of directors had set up a committee chaired by independent director David Sidwell, former chief financial officer at Morgan Stanley, to conduct an independent investigation into the trades and the bank's control systems.

A source close to the bank said the trades involved positions with a notional value of about $10 billion.

The bank said it had covered the risk resulting from the unauthorised trades, and its equities business was again operating normally within previously defined risk limits.

It said the trader had allegedly concealed the fact his trades violated UBS risk limits by executing fake exchange-traded fund (ETFs) positions.

"Following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorised activity," the bank said.

ETFs are index funds listed on an exchange and can be traded just like regular stocks. They try to replicate index performances and offer lower costs than actively managed funds, but regulators have warned about risks from some complex ETFs.

The instruments involved in the UBS case are similar to those that Jerome Kerviel, the rogue trader at Societe Generale, traded when he racked up a $6.7 billion loss in unauthorised deals in 2008.

Christoph Blocher, vice-president of the right-wing Swiss People's Party (SVP) -- the country's biggest -- renewed his calls for a splitting off of the investment bank.

"One has to seriously examine a ban on investment banking for commercial banks," he told the SonntagsZeitung newspaper, adding his party might team up with the center-left Social Democrats to push for such a move.

(Reporting by Emma Thomasson and Silke Koltrowitz; Additional reporting by Steve Slater in London; Editing by David Hulmes and Peter Graff)

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UBS $2 billion rogue trade suspect held in London (Reuters)

LONDON/ZURICH (Reuters) – Swiss bank UBS said a trader who had lost it around $2 billion in unauthorized deals had been arrested in London, where police were holding 31-year-old Kweku Adoboli.

Adoboli -- working as a director of exchange traded funds and Delta 1 trading, according to his profile on networking site LinkedIn -- was arrested during the night at UBS's London office on suspicion of fraud, sources close to the situation told Reuters.

UBS said it discovered the problem on Wednesday afternoon, and police said they had launched an investigation.

"The man was taken to a City of London police station for questioning and he remains in custody while officers are continuing to investigate this matter," City of London police Commander Ian Dyson told reporters.

The University of Nottingham computer science and management graduate was described by a former landlord as a good tenant of a 1,000 pound ($1,600) per week apartment close to UBS in London's East End, where he lived until recently.

"I can confirm that an employee of the bank was arrested in London in connection with the statement," a UBS spokesman said, after the bank had revealed the loss.

UBS shares closed down 10.8 percent after it said it might post a third-quarter loss following the rogue trades, a huge blow as it struggles to rebuild its credibility after years of crises.

The loss effectively cancels out the 2 billion Swiss franc ($2.3 billion) saving the bank had hoped to make in a cost-cutting program announced last month in which it will axe 3,500 jobs.

It also threatens the future of UBS's investment bank, which is being reviewed by chief executive Oswald Gruebel as part of a wide-ranging restructuring following heavy losses in the credit crisis and a damaging scandal over bankers helping rich U.S. clients dodge taxes.

UBS, which said no client positions were affected, is scheduled to hold an investor day on November 17 at which it was expected to announce major restructuring of the investment bank.

"The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion," the bank said in a statement.

UBS employed almost 18,000 people in its investment bank at the end of June, most of them outside Switzerland, particularly in London and the United States.

"(This) is a staggering demonstration that all the clever systems that the banks now have, especially after the financial crisis, still cannot stop a determined individual getting round them if they want to," said Chris Roebuck, Visiting Professor at Cass Business School in London.

"It will yet again confirm to the majority of shareholders who are Swiss that investment banking is not 'proper' banking, as private banking is."

UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches followed by repeated pledges to fix risk systems.

KERVIEL

Any losses in UBS's investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world's biggest wealth manager but has slipped to third place.

"This loss has the scope to have a material impact on the perception of UBS's private bank, impacting its future operating trends," Goldman Sachs analysts Jernei Omahen and Peter Skoog said in a note.

"Today's announcement therefore adds to the long list of arguments (and pressure) for a substantially smaller investment bank."

UBS's news caused disbelief among market operators.

The last similar case was when Jerome Kerviel, then a trader at Societe Generale, racked up a $6.7 billion loss in unauthorized deals revealed in 2008. Kerviel was sentenced to three years in prison in October 2010.

Both Kerviel and Adoboli were the same age when the scandal broke and both worked with so-called Delta 1 products, derivatives which closely track the underlying securities and give the holder an easy way to gain exposure to several asset classes. Examples include equity swaps, forwards, futures and exchange-traded funds.

"It is amazing that this is still possible," said ZKB trading analyst Claude Zehnder. "They obviously have a problem with risk management. Even when the amount isn't so high, it is once more a loss of confidence that casts UBS in a poor light."

"With this they are losing a lot of credit that they had regained with effort," he added.

Switzerland's financial markets regulator FINMA said it had been informed of the case and was in close contact with UBS.

HEADS TO ROLL?

The bank has in the past two years tried to rebuild the investment bank that nearly felled it during the financial crisis. It needed a state bailout after heavy losses on U.S. subprime mortgage-related securities.

Under Gruebel and investment bank boss Carsten Kengeter -- themselves both once traders -- it hired hundreds of traders in a bid to boost its bond business.

Several analysts said the incident made it more likely Kengeter would be in the firing line, while Gruebel could step down sooner rather than later.

"Gruebel saved the bank from destruction, so his main job is done. It is only a matter of time before he steps down. If it means he leaves a little sooner, it does not change a lot. But the investment bank is a bit of a disaster, and the knives will be out for Kengeter," said Peter Thorne, analyst at Helvea.

Another analyst who declined to be named said: "Some important heads are going to have to roll, and some are saying that after a series of missteps with the IB, Kengeter himself will have to go."

Former Bundesbank head Axel Weber is due to join the UBS board in May and take over as chairman in 2013.

The weak performance of the investment bank and tough capital rules in Switzerland had already attracted intense scrutiny over how UBS will cope, with analysts calling for a retrenchment of the investment bank.

The rogue trader scandal came as Swiss politicians were debating tough new capital rules designed to make sure big banks can weather future crises without having to be bailed out by the state.

"It shows that investment banking is a risky business and that it is important that systemically relevant functions are clearly separated from the rest of the banking business," Caspar Baader, parliamentary leader of the right-wing Swiss People's Party, told Swiss television.

($1 = 0.870 Swiss franc)

(Additional reporting by Andrew Thompson in Zurich, and Sarah White, Steve Slater, Keith Weir, Stefano Ambrogi and Douwe Miedema in London; Writing by Sophie Walker and Alexander Smith; Editing by Dan Lalor and Will Waterman)

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