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=The UBS Logo, pictured August 19, 2003, in Zurich, Switzerland. (STEFFEN SCHMIDT/AP)
=The UBS Logo, pictured August 19, 2003, in Zurich, Switzerland. (STEFFEN SCHMIDT/AP)

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UBS scandal undermines investment bank model Add to ...

Ossie Gruebel must be regretting the day he agreed to take the helm at UBS A $2-billion (U.S.) shock loss, apparently the fault of a single rogue trader, has dealt a huge blow to the Swiss bank's post-crisis revival hopes. Though UBS can absorb the financial damage, the case for getting out of investment banking has been given renewed force.

The exact nature of the unauthorized trades, which UBS only discovered a day ago, is uncertain. Police in London have arrested a 31-year-old man. According to the Swiss paper NZZ, the alleged culprit worked in the bank's giant equities division. UBS says no client positions were affected. But it's still unclear how the losses came about. Did a proprietary position go wrong? Or was it a result of an out-of-control trader in a supposedly safe client business, similar to Société Générale's Jérôme Kerviel in 2008?

Even if the rogue trading pushes UBS into a third-quarter loss, the bank should be in the black for the full year. After tax, the loss knocks about one-half on 1 per cent off its core Tier 1 capital. That's uncomfortable, but hardly life-threatening. But the damage will delay the benefit of 3,500 recently announced job cuts, which were meant to deliver $2.5-billion in annual savings.

The dent to UBS's still-fragile reputation is more severe. After its near-death experience in 2008, the bank has stressed its reduced risk profile. Those claims now lie in tatters: the rogue trading loss is about 24 times the average daily value at risk in UBS's investment bank in the second quarter. Private bank clients, who only recently stopped withdrawing their cash from UBS, have a renewed impetus to switch banks.

However, getting out of investment banking is easier said than done. It's hard to see regulators encouraging another lender to take over UBS's business. Closing the unit, and winding down legacy positions, would involve huge costs – and more risks. But UBS's rivals should resist the temptation to gloat. For the second time in four years, a single trader has racked up a multibillion-dollar loss before being caught. The argument that banks are best off when they combine investment and retail businesses just became harder to defend.

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