UBS is expected to plunge bank into the red this quarter after the bank said a single rogue trader had cost it $2bn (£1.26bn).
Ratings agency Moody’s has put the bank on review for a potential downgrade, it said late last night, citing “ongoing weaknesses in the group’s risk management and controls”.
The trader at the centre of the storm, believed to be 31-year-old Kweku Adoboli, was arrested at the bank’s City offices at 3.30am yesterday morning and taken to Bishopsgate police station following a probe into some unusual transactions.
It is understood that after the loss was discovered, Adoboli’s boss John Hughes resigned.
In an email to the bank’s 65,000 employees, UBS chief Oswald Grübel said: “We regret to inform you that yesterday we uncovered a case of unauthorised trading by a trader in the investment bank… we currently estimate the loss on the trades to be around $2bn.”
Adoboli, who was a director on the bank’s “delta one” equities desk, is believed to have been trading with the bank’s own capital when the deals under investigation occurred.
Although Grübel assured employees that “no client positions were affected”, the incident is a major blow for a bank that was just beginning to claw its way back to success after being bailed out by the Swiss state.
The loss is equivalent to most of the annual $2.5bn cost savings that the bank had hoped to make by axing 3,500 workers globally.
Market participants speculated that Adoboli could have been trading on the Swiss franc, which moved some ten per cent in two minutes on 6 September, when the Swiss National Bank unveiled a shock decision to peg its currency to the euro.
The trader was a specialist in exchange-traded funds, instruments that can allow investors to increase their leverage on single trades to an almost unlimited degree.
He posted on his Facebook page, since deleted, that he “need[ed] a miracle” after the Swiss move to peg the currency last week. His father John Adoboli, a retired UN worker from Ghana, told reporters last night he was “heartbroken, because fraud is not our way of life”, but did not wish to draw conclusions.
UBS will now begin a wide-ranging review of its risk management practices, involving a probe into its entire delta one desk, which uses both client and proprietary capital to trade derivatives that track underlying assets.
Cass Business School’s Sonia Falconieri suggested that the case could be used to fast-track reforms proposed by John Vickers this week to ring-fence banks’ investment banking arms from their retail operations. But she added that although it could insulate depositors from the effects, the reforms “will not prevent further incidents from happening”.