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Marcel Ospel picked up the phone on Monday March 17, with bad news for his London-based head of equities, John Wall.
The UBS chairman had spent the weekend in board meetings. Although the financial markets were focused on the imminent rescue of the US investment bank Bear Stearns, UBS had uncovered problems of its own.
A tortuous analysis of the bank’s remaining exposures to sub-prime mortgages in the US had confirmed that Switzerland’s biggest bank would have to launch an enormous rights issue to shore up its balance sheet.
Ospel told Wall to begin rallying the troops. Within 48 hours he and his team had their backers in place.
Top of the list was JPMorgan Chase, which had just completed its Bear Stearns bailout. It was joined by Morgan Stanley, Goldman Sachs and BNP Paribas.
The same four banks had helped Societe Generale raise cash in the wake of their rogue trader scandal weeks earlier. They were the first that UBS approached in its time of need.
Two days later, on Good Friday, the banks were pulled together for a series of conference calls with the UBS senior management team, and over the following week they fine-tuned the details on what would become a pound stg. 7.4 billion ($16 billion) cash call.
Within the inner sanctum of Wall Street’s ruling elite, it was an open secret that UBS was about to announce huge write-downs and a new fundraising exercise.
“A lot of the Swiss establishment had been calling for Marcel’s head for some time,” says one UBS executive. “When the size of the fundraising became apparent there was no way he could stay on.”
By the time Ospel walked into the boardroom of the bank’s Zurich headquarters last Monday night, he had made up his mind. He would have to stand down — his dream of turning a Swiss private bank into a global financial powerhouse had turned to dust.
On Friday an old adversary emerged with a plan to undo Ospel’s work. Rebel shareholder Luqman Arnold, who was forced out of UBS in 2001 following a row with Ospel, called for the bank to sell its asset management business, along with its Brazilian and Australasian operations.
The former chief executive of the British mortgage bank Abbey — and now head of the investment vehicle Olivant — also demanded UBS hive off its investment bank from its private banking operations. Ospel’s humiliation was complete.
Ospel had been one of the great survivors of the global credit crisis. He clung to office while Chuck Prince fell on his sword at Citigroup and Stan O’Neal was forced out at Merrill Lynch.
He became UBS chief executive after leading the reverse takeover of the old Union Bank of Switzerland by the Swiss Bank Corp (SBC) in 1998. UBS had been laid low by the collapse of Long-Term Capital Management and long-running legal battles related to tracing assets held by victims of the holocaust.
In his time at SBC, Ospel did a string of deals, buying British merchant bank SG Warburg, then the US-based derivatives business O’Connor. He later added US brokers Paine Webber and Dillon Read.
The old UBS had bought Philips & Drew, among other things. The combined bank would conquer the world, according to Ospel.
“Marcel built UBS from nothing,” says one of his former key lieutenants.
“We were the first European bank to really take on Wall Street on their own patch. That was all down to Marcel.”
Ospel, who came from a relatively poor family in Basel and worked his way up without a university degree, became chairman in 2001 — Luqman Arnold was chief executive. Ospel had not been long in the chairman’s seat when Swissair, the Swiss national airline, collapsed. He pledged the bank’s support to a rescue without involving the board. A furious Arnold attempted to stand up to Ospel. In the end it was Arnold who was forced out.
Critics of Arnold claim that his attack on Ospel’s legacy is a straightforward act of revenge.
“Luqman didn’t realise that while he was notionally the chief executive, he wasn’t in charge of anything really,” says a former UBS executive who remains close to Ospel. “Marcel ran that bank.”
Another former UBS executive said: “Marcel was never someone to jump around or raise his voice. But he’s all about ego. He always wanted to be bigger than the Americans. That seems to be why they’ve ended up where they are today.”
Ospel’s aim to conquer Wall Street took shape with the appointment of John Costas as chief executive of investment banking. Costas, who had been poached from arch-rival Credit Suisse, was given licence to splash out on big-name investment bankers.
Costas and his team developed the strategy of investing in mortgage-backed securities. By June 2005 he committed himself to the project full-time, stepping down as investment banking head to set up Dillon Read Capital Management (DRCM), an internal hedge fund. The traders left to run the UBS book followed their former leader into the sub-prime bets.
“Ospel is the best banker in Switzerland by a mile,” one UBS executive in London says. “But he was still the guy who sat on the risk committee while everything was ploughed into US mortgages. At its peak our balance sheet was $US2.3 trillion. It got to a point where $US400 billion of that was held in US mortgages. John Costas made those decisions and Ospel let him.”
Donald Marron, former chairman of UBS America, said he has been “surprised at the breadth of the problem” the sub-prime crisis had triggered.
Marron, now chairman of venture capital firm Lightyear Capital, won’t comment specifically on his former firm’s woes but says credit standards were lowered across the board, “not just in mortgages”, and that “risk was not repriced to account for this”.
“Banks went from being long-term lenders to packagers. That’s obviously a very different dynamic. It’s not that people didn’t figure out that there were issues, it’s just that once they did there was no liquidity in the market,” he says.
Losses in DRCM began to emerge a year ago. By last May it was closed down after published losses hit pound stg. 190 million. Costas left UBS, but it was too late to get out of the positions.
A slew of top executives followed Costas out of UBS. Eventually, Peter Wuffli, the UBS chief executive, was fired. Ospel, however, stayed put — until last week.
A $US3 billion fundraising announced last week by Lehman Brothers served as a reminder that UBS is not the only bank in trouble. That was followed by a further $US4 billion of sub-prime write-downs by Deutsche Bank.
Merrill Lynch is expected to announce more write-downs with its forthcoming results.
Expectations are mounting that Citi’s new boss, Vikram Pandit, is poised to go cap in hand to sovereign wealth funds for another injection of capital.
“Since the start of the year, particularly in March, there has been further deterioration in asset quality,” Jon Peace, an investment banking analyst at Lehman Brothers, says. “Citi and Merrill have been heavily involved in what are now recognised as the most problematic types of investment. They will have to take further marks against those assets, which will lead to further write-downs.”
The pain has not been confined to UBS’s senior staff, who received 80 per cent of their pay last year in shares. GIC, the investment arm of the Singapore government, is sitting on paper losses of about pound stg. 2.4 billion on its pound stg. 6.5 billion bailout of the bank late last year. The fund has also pumped money into Citi’s $US12.5 billion fundraising earlier this year.
The Abu Dhabi Investment Authority is nursing paper losses of close to pound stg. 1 billion from the capital injection it gave to Citi in November.
The Kuwait Investment Authority, Korea Investment Corp and Mizuho Corporate Bank are estimated to have combined losses of around pound stg. 450 million from their January capital injection into Merrill Lynch.
China Development Bank and Temasek, which bought into Barclays to support the British bank’s attempted bid for ABN AMRO, have made paper losses of about pound stg. 900 million on their investment.
In spite of the losses, sovereign wealth funds are likely to be prepared to shell out again. If the global banking system is to get back on its feet, new capital is likely to be needed and the sovereign wealth funds are the only investors with serious cash in their coffers.
Until and unless they do, the global banking nightmare seems far from over.