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Beware the holes in the Swiss system

UBS’s reputation will be hard to fix after alleged rogue trading

‘We will not rest,” trumpets UBS’s nauseating advertising campaign, in which it attaches its name to heroic figures of the past such as Sir Edmund Hillary, who is in no position to object to the self-congratulatory tone. The message, supposedly, is that UBS will not cease in its endeavours to help its clients. To which, after the bank’s alleged bn rogue-trading loss, clients may fairly reply: if you can’t even protect yourself, why should we believe you can do anything for us?

True to his sloganising, the chief executive, Oswald Grübel, promised yesterday to “spare no effort to establish exactly what has happened”. A full explanation is indeed required given that UBS – having been burned horribly, and naively, in the US sub-prime mortgage catastrophe – was meant to have installed state-of-the-art risk-control systems across its bank. We promise we won’t mess up again, had been Grübel’s message to shareholders, Swiss regulators and the Swiss public.

A loss of bn can be borne with little direct pain, but the reputational damage is bound to be severe. Customers will wonder whether UBS understands the products it is selling. For a bank that wants to restore its wealth management division to its former glory, that’s a severe handicap.

The painful twist is that the sketchy details of the tale don’t seem especially novel. Société Générale, where Jérôme Kerviel racked up a €4bn loss in 2008, illustrated the dangers that lurk when traders are given responsibility for trading both clients’ capital and the bank’s. This is where risk-control systems should be concentrated. UBS can’t say it wasn’t warned.

Swiss regulators already appeared less than enthusiastic about UBS staying in investment banking, which is why there was speculation in May about demerging the operation and moving the base entirely to London.

That idea – if it was ever seriously contemplated – is presumably now dead. It seems more likely that Grübel will be obliged to shrink the unit to the point where it is no longer capable of spoiling the entire bank’s reputation. If you’re no good at mountaineering, don’t try to climb Everest. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds