UBS said a trader who lost the Swiss bank about US$2 billion in unauthorized deals had been arrested in London, with sources close to the situation naming the suspect as 31-year-old Kweku Adoboli.
Adoboli — working as a director of exchange traded funds and Delta 1 trading, according to his profile on LinkedIn — was arrested during the night at UBS’ London office on suspicion of fraud, the sources said on Thursday.
UBS said it discovered the problem on Wednesday afternoon, but gave no details of the alleged trades involved.
Adoboli, a University of Nottingham computer science and management graduate, was described by a former landlord as a good tenant of a ￡1,000 (US$1,600) per week apartment close to UBS in London’s East End, where he lived until recently.
His father, John Adoboli, a retired UN employee from Ghana, said he knew the financial sector was a high-risk area, but he had no doubts about his son’s competence and integrity.
“From what the reports are saying, it could be that he made a mistake or wrongful judgement,” he said by telephone from the Ghanaian port city of Tema, saying he had to speak to his son before drawing any conclusions.
“I’ve been calling his phone since and I am hoping he’d be granted bail soon so I can hear his side of the story,” he said.
UBS stock ended the day down 10.8 percent, its lowest close since March 2009, after the bank said it might post a third-quarter loss due to the trading, a huge blow as it struggles to rebuild credibility after years of crises.
Late in the day, Moody’s said it had placed the bank’s long-term debt and deposit ratings on review for a possible downgrade, a further blow to the bank.
The loss effectively cancels out the 2 billion Swiss franc (US$2.3 billion) saving UBS hoped to make in a cost-cutting drive detailed last month involving 3,500 job cuts.
It also threatens the future of UBS’ investment bank, which is being reviewed by chief executive Oswald Gruebel as part of a wide-ranging restructuring after heavy losses during the credit crisis and a damaging scandal over bankers helping rich US clients dodge taxes.
Moreover, it undermines claims by the Swiss bank and the industry that such events are a thing of the past.
UBS, which said no client positions were affected, is scheduled to hold an investor day on Nov. 17 at which it was expected to announce a major overhaul of the investment bank. The bank employed almost 18,000 people in its investment bank at the end of June, most of them outside Switzerland, particularly in London and the US.
“[This] is a staggering demonstration that all the clever systems that the banks now have, especially after the financial crisis, still cannot stop a determined individual getting round them if they want to,” said Chris Roebuck, visiting professor at Cass Business School in London.
“It will yet again confirm to the majority of shareholders who are Swiss that investment banking is not ‘proper’ banking, as private banking is,” he said.
Any losses in UBS’ investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world’s biggest wealth manager but has slipped to third place.
“This loss has the scope to have a material impact on the perception of UBS’ private bank, impacting its future operating trends,” Goldman Sachs analysts Jernei Omahen and Peter Skoog said in a note.
“Today’s announcement therefore adds to the long list of arguments [and pressure] for a substantially smaller investment bank,” they said.
UBS’ news caused disbelief among market operators.
The last similar case was when Jerome Kerviel, then a trader at Societe Generale, racked up a US$6.7 billion loss in unauthorized deals revealed in 2008. Kerviel was sentenced to three years in prison in October last year.
Both Kerviel and Adoboli were the same age when the scandal broke and both worked with so-called Delta 1 products, derivatives which closely track the underlying securities and give the holder an easy way to gain exposure to several asset classes. Examples include equity swaps, forwards, futures and exchange-traded funds.
Switzerland’s financial markets regulator FINMA said it had been informed of the case and was in close contact with UBS, while a regulatory source said Britain’s Financial Services Authority was in close contact with Swiss authorities.
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