Stock Market Predictions

Trading loss latest headache for UBS brokers

Stock Market Predictions

The $2 billion loss stemming from a London trader's unauthorized dealing could wipe out the company's third quarter profits. It also undermines UBS' three-year effort to put losses from the financial crisis and a devastating U.S. tax-evasion scandal behind it.

The news also could undermine confidence in UBS and create more headaches for financial advisers who once again must defend their employer.

"They are reaching a point where they can't handle any more negative publicity," said Ron Edde, a recruiter for search firm Armstrong Financial Group in Carlsbad, California, who spoke with some UBS advisers after UBS announced the loss. "They are expressing grave concerns about how they will be perceived."

UBS (UBSN.VX) (UBS.N) said the trader was arrested in London Wednesday night on suspicion of fraud. Sources close to the situation identified the trader as Kweku Adoboli.

Officials at the bank told advisers that the loss would not harm the bank's health.

"I want to reassure all of you and your clients that UBS remains strong, stable and well-capitalized," UBS Wealth Management Americas CEO Robert McCann said in a memo to the bank's U.S. advisers Thursday. "No client positions were affected by these trades and we continue to have one of the highest Tier 1 capital ratios in the industry."

UBS was one of the first global banks slammed by the downturn in mortgage markets, and ultimately had tens of billions of dollars in credit losses. The bank needed a bailout from the Swiss government.

Just as the financial crisis faded, the U.S. government accused UBS of helping Americans hide assets overseas in order to evade taxes. The Swiss bank, forced to identify thousands of customers, quickly suffered an exodus of client assets.

UBS brokers were the largest sellers of auction rate securities that became impossible to sell when credit markets seized up in 2008. The firm also sold so-called structured notes backed by Lehman Brothers debt throughout 2008, just months before the U.S. investment bank collapsed.

In each case, events outside the brokerage unit put U.S. financial advisers on the defensive with clients.

"They cannot seem to get out of their own way. Just when you think a crisis is over, some new problem always seems to pop up," said Andy Bodner, a former UBS broker who in January 2010 formed Double Digit Investment Group, an independent investment adviser in Parsippany, New Jersey.

Bodner said every new piece of bad news forces advisers to defend or explain the actions of their employers to anxious customers. "It's not the sort of thing you want to talk about, to have to call your clients and say 'Your money is still safe'."

UBS Chief Executive Oswald Gruebel, hired in 2009 to turn UBS around, recruited former Merrill Lynch executive McCann to revive the U.S. brokerage. Since then UBS has slowed and then reversed the defection of clients and financial advisers.

"We understand that you have already had to contend with unfavorable, volatile markets for some time now," Gruebel told employees in an internal memo. "While the news is distressing, it will not change the fundamental strength of our firm."

Still, The $2 billion trading loss mars what has been a year of regrowth, advisers and recruiters said. Some advisers, particularly those already on the fence, are more likely to explore making a move.

"There's no positive way to spin this: it's either fraud or incompetence. Clients will demand answers," Edde said. A UBS spokeswoman declined to comment in response.

One UBS adviser, who is not authorized to speak publicly, played down the news and said he had not received client calls. In these cases, he said, he reminds investors that their stocks and bonds are safe regardless of what happens to UBS, the bank.

Charles Huebner, a former UBS senior vice president who left the firm in 2010 after 20 years, said crises at the global bank didn't impact client relationships.

"You had these overarching things come out of the blue, but I didn't see any movement at all where people said 'I don't want to deal with this firm anymore," said Huebner, who now runs Pointe Capital Management LLC, an independent investment adviser in Gross Pointe, Michigan.

Still, some advisers and recruiters said the latest news, piled up on top of all the other missteps, will not help UBS restore its reputation as a safe harbor for the world's rich.

"We know they have new management trying to turn things around, but this reinforces the perception that UBS has a lot more challenges ahead of them," said Darin Manis, chief executive of Colorado Springs recruiting firm RJ & McKay.

(Reporting by Joe Giannone; Additional reporting by Suzanne Barlyn; Editing by Jennifer Merritt and Walden Siew)