UBS under pressure to explain $2B trading scandal

[September 16, 2011]  GENEVA (AP) -- UBS was under pressure on Friday to explain how its managers failed to catch a $2 billion loss due to rogue trading, with experts calling into question the Swiss bank's ability to turn around its scandal-hit image.

As police in London obtained a 12-hour extension to question the trader, 31-year-old trader Kweku Adoboli, the bank's investors and the wider industry wondered about the fallout, both for UBS as a storied Swiss financial institution and for the banking sector.

Commentators and politicians called for senior managers at UBS to take responsibility for the loss, which the bank said could put its third-quarter results in the red. Ratings agency Moody's put UBS's credit grade on review for possible downgrade, citing worries over the future of its London-based investment unit.

UBS shares on Friday recovered a fraction of the losses they suffered the day before. Investors took the chance to buy UBS shares cheaply, sending their price up 2.5 percent to 10 Swiss francs ($11.45) on the Zurich exchange by noon. Shares had slumped 10 percent the day before, after the bank said a lone employee had caused the massive loss with unauthorized trades.

Swiss media questioned how one UBS trader could have managed to cause a $2 billion loss without others around him noticing sooner. Respected banking professor Hans Geiger told Swiss television station SF he doubted the lone trader account put forward by UBS.

Police in London continued their interrogation of Adoboli. Normally police cannot hold a suspect longer than 24 hours without pressing charges. But under British law, a police superintendent can extend the 24-hour detention period by up to 36 hours for serious crimes. After that, police would need to get a court order to continue questioning for up to 96 hours more.

UBS spokesman Andreas Kern declined to comment on a report in Swiss newspaper Tages-Anzeiger on Friday, that the entire trading team in London where the alleged unauthorized deals took place had been suspended.

Kern said the paper's report of fresh job cuts at the investment bank referred to a reduction of about 1,600 posts already announced last month as part of a plan to save some 2 billion francs over the next two years.

The international banking industry has been trying to put stricter controls on its traders in the wake of a 2008 scandal at France's Societe Generale, when trader Jerome Kerviel gambled away euro4.9 billion ($6.7 billion), and the infamous case of Nick Leeson, who made so many unauthorized trades that it caused the collapse of the British bank Barings in 1995.

Chief executive Oswald Gruebel was brought in two years ago to rehabilitate the bank's damaged reputation after a series of missteps that included massive losses in the subprime mortgage market and an embarrassing U.S. tax evasion case.

The scandal casts doubt on his ability to improve the bank's image.

Moody's ratings agency cited such concerns when on Thursday night it placed UBS's credit grade on review for a possible downgrade.

Although it said the $2 billion losses would be manageable for a bank the size of UBS, they "call into question the Group's ability to successfully complete the rebuilding of its investment banking operations."

[Associated Press; By FRANK JORDANS]

Bob Barr contributed to this report from London.

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