Subscribe to this blog's feedAlea points to an account of the problems at UBS by a Swiss financial journalist, Dirk Schutz.
From the summary:
The Economist speculated that there was, “in UBS’s London based derivatives business, a hole of unknown (but possibly huge) proportions.”...What happened at UBS is a complicated story involving power, ambition and vanity. It shows that risk management controls in the largest of the Swiss banks had not extended far enough from the experience.
When the financial markets hit crisis, Schutz writes, the bank's poor internal controls left it with massive losses in its derivatives business. More excerpts here.
The joke is, of course, that Schutz published his book almost a decade ago - he's talking about the 1998 crisis. And now - well, here's UBS admitting its latest risk management problems.
When I talked to Jeremy Berkowitz at the University of Houston for this feature a few months ago, here's what he told me:
The most worrying aspect of the recent failures in risk management is their similarity to the events of 1998. Then, a series of unexpected events - the Russian and Asian debt crises and the failure of Long-Term Capital Management - drove several banks to report multiple VAR exceptions. In the case of UBS, 2007 saw its first exceptions since 1998.
"It didn't change after 1998," says Berkowitz, who analysed the models banks used in a 2001 paper to discover they were generally inaccurate and inferior to simpler statistical models of profit and loss. "It's almost like history repeating itself."
It's even more like it now...
Comments (1)
UBS' failures are astonishing and, as we are finding out, are in many ways reflective of errors financial institutions were making more generally in the prelude to the credit and liquidity squeeze.
There's far too much to go into here, but at first glance a few common mistakes almost leap out of the page. They include a lack of integrated risk management, the belief that super-senior ABS CDO tranches constituted 'free-money', and a lack of so-called 'look-through analysis' on CDO exposures*.
(*So despite the fact they are a bank -- no doubt using some fairly sophisticated means to calculate how they're going to lend to regular mortgage-holders -- they didn't investigate who they were effectively lending money to via CDO structures properly; at least, beyond the level of credit ratings.)
Somewhat cryptically, the document also continuously refers to 'cultural issues' at Dillon Read Capital Management -- the bank's internal hedge fund set up in the height of the credit bull run, 2006. From these and other references, it sounds as if UBS were so keen to outperform their rivals and have a winning fund unit that they let its management run well-and-truly amok. Apparently, one profitable strategy the fund pursued was a simple carry trade, taking advantage of the Swiss bank's internal funding rate and investing in higher-yielding assets. The phrase about the lunatics taking over the asylum springs to mind...
Posted by Mark Pengelly | May 9, 2008 10:23 AM
Posted on May 9, 2008 10:23