UBS hit by $2 billion loss from rogue trader

LONDON (MarketWatch) — Swiss bank UBS AG said Thursday that a rogue trader in its investment-banking division ran up $2 billion of losses, which could push the firm’s third-quarter results into the red.

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The announcement followed the early-morning arrest of a 31-year-old man in London on suspicion of ”fraud by abuse of position,” according to a statement from City of London police. The suspect remains in custody.

A spokesman for UBS CH:UBSN +5.23%   UBS +4.12%   declined to name the trader, but The Wall Street Journal identified him as Kweku Adoboli, an employee in the firm’s exchange-traded funds unit.

The bank, which has battled a string of high-profile crises over the past couple of years, said it may now report a loss for the current quarter, but added that none of its clients were affected.

Shares in UBS dropped 9.9% in afternoon trading.

According to his profile on networking site LinkedIn, Adoboli is a director of ETF and Delta One — a class of derivatives that are intended to move in very close step with the underlying asset.

Delta One is also the division at Societe Generale SA FR:GLE +3.44%  where Jerome Kerviel was a trader in 2008, when Kerviel’s unauthorized trades cost the French bank 4.9 billion euros ($6.7 billion).

In that case, Kerviel was accused of placing €50 billion of bets on stock-market futures — more than the entire market capitalization of SocGen at the time.

Latest crisis

The latest scandal for UBS comes on the back of several major setbacks in recent years.

The bank took some of the heftiest write-downs in Europe following the subprime crisis and was at the center of a recent high-profile tax-evasion scandal. It agreed to hand over the names of thousands of possible tax dodgers to U.S. authorities as part of a settlement.

UBSN 10.26, +0.51, +5.23% 2

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The loss of confidence among clients led to a massive outflow of funds from the group’s private-banking operations, which it had only recently managed to stem.

Deutsche Bank analyst Matt Spick said a $2 billion loss would more than wipe out his current forecast for a third-quarter pretax profit of 1.5 billion francs ($1.7 billion).

On top of that, the announcement “may undo some of the reputational improvement in the private bank,” he added.

“Perhaps the silver lining is that this event could accelerate the decision-making progress at UBS on how to position and right-size the investment- banking operations within the group,” Spick said in a note to clients.

The investment-banking arm has struggled compared with rivals such as Credit Suisse Group AG CH:CSGN +4.75% CS +2.47% , leading the group to announce last month that it will cut around 3,500 jobs in the face of weaker earnings and slowing economic growth.