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Tuesday, 29 July 2014

UBS: the shape of things to come

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Monday trading in Europe was totally anticlimactic. I, for one, knocked off early only to go home and watch microphone bearing news reporters in wet weather gear standing in the open air in New York City telling us that it getting wetter and windier. Not Pulitzer Prize winning stuff, to be sure. The scoop of the day – although it wasn’t totally new news – was the story that UBS is to cut 10,000 investment banking jobs.

Anthony Peters, SwissInvest Strategist

It’s not that many years ago that UBS was regarded as a first division player – lower end of the first division maybe, but first division, nevertheless.

Of course UBS isn’t UBS. The old Union Bank of Switzerland always was the muscle bound oaf amongst the big three Swiss. Under pressure from activist shareholders, it merged in 1998 with Swiss Bank Corporation, retaining the acronym of the Zurich based UBS and three key logo of the Basel based SBC.

SBC, the smallest of the three (CS was the number two), had tried to make up for its lack of size by aggressively expanding in the non-commercial banking arena. It had bought Dillon Read, the venerable white shoe Wall Street investment bank, S.G. Warburg, a leading London merchant bank and inventor of the Eurobond market, Brinson Partners, the asset manager (which came with the highly controversial Gary Brinson as part of the package) and O’Connor, the powerful and innovative Chicago derivatives house.

A match made in heaven? In the terms of reference of the late 1990s maybe. Investment banking needed capital and only be teaming up with larger commercial banking neighbours could this be found. However, 20 years later we were to find that the most toxic of mixes is the one containing excess capital and investment bankers.

Please don’t get me wrong; this is not the end of investment banking. What it is the beginning of the end of large commercial banks owning the business

Putting relationship banking and transactional banking under one roof has done nobody much good – other than the few individuals who were first in and first out. Wells Fargo and Lloyds thrived without the investment bankers in the same way as Goldman Sachs did without their own commercial banking, deposit taking counterparts.

The derivative product mis-selling scandals, especially the one which has Barclays in front of the judges as we speak, show what happens when investment bankers are let loose on commercial customers. That high net worth investment management clients, the likes of which UBS has more than enough, might be at risk of being exposed to similar potential misconduct is evident.

Without shorts

Yet it was not this that triggered the pending retrenchment of UBS. The strong revenues which investment management and asset management generated gave the investment banking division a free lunch and as other, more powerful commercial/investment banking partnerships overtook it, it needed to take more risk in order to keep up. When the tide went out, to use Warren Buffet’s analogy, it was amongst the first to be found to have been swimming without shorts. It’s sub-prime mortgage exposure was eye-watering.

Nevertheless, we should not be laughing at it. I can’t remember when I first wrote that it is “game over” in investment banking as we have come to know it and that we are in the early phases of a return to the industry as it presented itself in the 1980s or the 1990s. There are too many vested interests amongst the current leadership cadres who hate the idea that they should be the first bunch in 25 years not to get seriously rich for running the business – why should their old bosses now be retired due to excess wealth while they should have to slog until they are 65? Not part of the plan!

UBS has now shot a broadside which will hit the industry below the water-line. The taboo has been broken and by pulling out of mainstream investment banking, knocking out a quarter of its workforce and retreating to wealth management, UBS is declaring that the theory that without an investment bank one is nothing might not be true. This is probably the first tree in the forest to fall but the lumberjacks will be streaming in, in force, before long.

Please don’t get me wrong; this is not the end of investment banking. What it is the beginning of the end of large commercial banks owning the business.

We will begin to see voluntary and involuntary departures, management buy-outs, the springing up of boutiques and so on and bit by bit the business will regenerate itself as the nimble business it once was. The balance sheet steam-roller is running out of fuel and don’t laugh at UBS for being the first large bank to acknowledge this and to act decisively. Many, many more will follow and the redundant UBS bankers will in time be grateful that they were first out of the door.

The real reshaping of the post-credit boom banking landscape begins here. 
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Footnote:

Apparently the game is already afoot at UBS: it was the old key card entry into the building trick this morning…. if your card didn’t work, straight to HR for a letter and your stuff in a bag. Pretty brutal. The letter says something to the effect that you are on two weeks paid leave and to come back in two weeks’ time to get your redundancy package.

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