The casual skeptic could be forgiven for thinking that Swiss financial octopus UBS (NYSE:UBS) is yet another avaricious investment bank trying to get rich by selling dubious securities to gullible clients. After all, the only big headlines the company attracts these days are dark ones about the fallout of its rogue trader scandal, in which a young desk jockey managed to sock it with a multibillion-dollar trading loss last year. The bank needs to distance itself further from such misadventures, so one way or another, it will soon go back to the banking roots that grew and sustained it for a long time.
Time for an exit
The trading scandal, which saw the company lose something in the neighborhood of $2.3 billion, was only the most recent indication that investment banking wasn't the golden path forward for UBS. The division was a notable casualty of the mortgage derivatives meltdown, losing nearly 60 billion Swiss francs ($65 billion) from 2007 to 2009, largely because of its investments in that asset class. It had the highly dubious honor of having to take the highest amount of writedowns on American subprime debt of any bank in Europe.
The bank eventually posted writedowns and credit losses totaling $44 billion in one particularly bad period stretching from late 2007 to mid-2008. That made it the continent's champion, ahead of such worthy contenders as HSBC (NYSE:HSBC), with $27 billion, and eternal domestic rival Credit Suisse (NYSE:CS), at $10.5 billion.
That awful performance would make even big American sinners of the time blush. After hemorrhaging those tens of billions, UBS required financial resuscitation from its home government to the tune of $59 billion in direct and indirect financial help. Even the worst-behaving Yankee dogs of the time didn't need that much assistance -- Citigroup (NYSE:C) and Bank of America (NYSE:BAC) were the biggest recipients of public largesse in the banking sector, and they took in a comparatively light $45 billion apiece in government bailout help.
Not-so easy money
A strong case could be made that UBS should never have waded into investment banking in the first place. From the founding of its root company in the 1860s, it was for many years a successful and fairly traditional take-deposit-and-make-loan retail and, later, commercial bank. Early on, it got into the wealth management business, and in a big way -- Swiss bankers are good at this -- and gained renown as one of the more important players in that sector, a reputation it still enjoys despite the disastrous showing of its IB.
But like most big European financials, it couldn't resist the rock-star energy and high potential returns of investment banking, so it also jumped into that business. This wasn't a bad idea in the late 20th century, when regulations were comparatively loose and shaky housing derivatives hadn't yet become the go-to asset class for IBs.
But then the new century came, and UBS took to mortgage-backed securities like a blind man riding a sugar rush.And we all know what happened to banks whose portfolios bulged with such assets -- they lost piles of money and ended up on the wrong end of expensive lawsuits.
So, looked at from a certain angle, the ensuing rogue trader scandal and the $2 billion-plus it leeched from the bank's coffers might have paradoxically been one of the most beneficial events in the company's history. UBS, already reeling from its embarrassing performance during the crisis era, got an additional incentive to get rid of its IB assets.
On the face of it, this seems to have worked. Earlier this month the bank announced it'll eliminate 10,000 jobs in the unit by 2015 and -- really, they promise -- focus on core competencies, keeping only the pieces of the IB that perform reliably well.
The long way home
But is UBS really making a concentrated push to ditch those assets? Lofty promises aside, as of the end of 3Q, it employed over 16,500 full-timers in its investment banking division. That was over one-quarter of its total worldwide staff, hardly a slim figure. That 16,500 number is down from that the previous year, but only by 5%. Meanwhile, in the company's retail and corporate banking division, the bank chopped its workforce by 11% to 10,000 or so over the same time span.
That IB manpower isn't powering results; rather, it's the opposite. Of the company's six divisions, IB was one of only two that posted an operating loss in 3Q. And at 2.9 billion francs ($3.1 billion), that shortfall was significantly deeper than the 998 million francs ($1.1 billion) posted by the distant No. 2, the corporate center unit.
Perhaps the latest tandem moves by the FSA, Britain's financial regulator, and FINMA, its Swiss counterpart, will light a more intense fire under the bank. The former smacked the company with a 29.7 million pound ($47.6 million) fine, which is small potatoes in financial conglomerate terms but a big serving of nasty porridge as far as embarrassing PR is concerned. Meanwhile, FINMA has imposed a set of of tight restrictions on UBS' IB activities, including a ban on starting new business activities and strict limits on the risks it can absorb.
Which seems unnecessary, given that the bank has already been well burned by its carelessness and should know better by now. It's been a slow learner and reactor in the last few years, but now it really has no choice but to return to a safer and more conservative space. Like it or lump it, it's started its inevitable journey back to the businesses that made it a player so long ago. Hopefully, that'll serve it better than its damaging foray into investment banking.