Swiss bank UBS is expected to shrink its investment bank business — source of a $2 billion rogue trading loss — and could fire senior executives as it tries to retain worried private clients and avert a ratings downgrade.
Analysts said the massive loss, announced on Thursday, was a significant blow for UBS's investment bank, which has struggled, like others in the industry, against falling markets and tough new regulation as well as the soaring Swiss franc.
The Tages-Anzeiger newspaper, citing UBS insiders, said the bank would announce a major restructuring, to include thousands more job cuts, at a planned investor day on Nov. 17. A UBS spokesman declined to comment.
"We expect UBS will come under material pressure from shareholders and FINMA to review its investment bank business ... the trading loss being the final straw, leading to material restructuring," said JP Morgan analysts in a note.
The trader blamed for losing the $2 billion, named in media reports as Kweku Adoboli, 31, was being questioned by police on suspicion of fraud for a second day Friday, .
'Mistake or wrongful judgement'Before he was arrested, the paper said Adoboli, UBS director of exchange traded funds, changed his Facebook page status to "I need a miracle."
His father John, a retired United Nations employee, said his son had made "a mistake or wrongful judgment," The Telegraph reported.
"We are all here reading all the materials and all the things being said about him. The family is heartbroken because this is not our way of life," he added. "I brought them up to be God-fearing and to appreciate decency. Growing up and through to school days they were very brilliant and respectful."
Adoboli, who was working for UBS in London, is originally from Ghana, but was educated at a $31,000-a-year boarding school in Britain, and later studied at Nottingham University, the Telegraph said.
The consequences of his alleged actions could be significant for UBS, which declined to give any new information on the case early on Friday.
Late on Thursday, Moody's said it had placed the bank's long-term debt and deposit ratings on review for a possible downgrade, a further blow to the bank.
"The losses call into question the group's ability to successfully complete the rebuilding of its investment banking operations," it said.
The $2 billion loss effectively canceled out the first year of savings from a recently-announced cost-cutting plan involving the loss of 3,500 jobs.
Hoped to save $2.3 billionIt had hoped to make an annual $2.3 billion saving under the scheme detailed last month.
"We believe that yesterday's event could have personnel consequences on senior management level, which in turn could lead to adjustments to UBS' business portfolio," said Vontobel analyst Teresa Nielsen.
"The exit from non-core businesses inside the investment bank could be accelerated," she added.
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.
Chief Executive Oswald Gruebel, himself a former trader who was brought out of retirement in 2009 to try to turn UBS around, is reviewing the size and structure of the investment bank, particularly its fixed income division, after he was forced to pull back from ambitious profit targets.
Gruebel had aggressively expanded the investment bank to almost 18,000 staff from 16,500 a year ago before global financial crises hit.
In a Sunday newspaper interview before the scandal broke, Gruebel said how the bank would be restructured depended on how Swiss regulators planned to implement tough new capital standards that parliament is expected to approve next week.
"What is clear is that we must become more efficient. That will prompt major criticism because of reductions, offshoring, outsourcing of jobs and activities," he said.
UBS stock, which fell 10.8 percent on Thursday to end at its lowest close since March 2009, was up 1.9 percent at 9.9 francs early Friday in line with the same rise on the European banking sector index.
New 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.
UBS isn't the first to be hit by a massive loss allegedly caused by a single rogue trader.
Societe Generale, France's second-largest bank, stunned investors in 2008 when it revealed that one of its staff had lost the bank €4.9 billion ($6.7 billion) through a complex scheme of unauthorized trades.
The trader, Jerome Kerviel, was convicted in October 2010 on charges of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly €50 billion between late 2007 and early 2008. He was also banned for life from working in the financial industry and ordered to pay back the the vast amount he had caused his employer to lose.
His fraud eclipsed that of previous so-called "rogue traders."
One of the most infamous was Nick Leeson, a British trader working for Barings Bank in Singapore.
He made unauthorized futures trades that lost more than $1 billion and led to the vulnerable bank's collapse in 1995.
Leeson served three-and-a-half years of a six-and-a-half year sentence in Singapore.