Saturday, September 24, 2011

What is really wrong with UBS?

In Singapore, as in many parts of Asia, if an employer decides to fire you, it almost never fires you. Instead, the employer calls the employee for a private meeting and then the employee “decides” to “resign”. And employer accepts the resignation.

UBS Chief Oswald Gruebel has recently declared that he would not resigned because although “he is responsible for everything that happens in the bank, he did not feel guilty”. [1] This was not surprising since after persistent mis-management of decades, company collapsing mistakes (!) no one in the financial services industry feels responsible or guilty and resigns. But because of the culture I have explained above, nobody here was suprprised when he changed his mind in Singapore and “resigned”.

But is that all? A so called lone wolf rogue trader and a CEO has gone and then will UBS be a better company? Isn’t there something else wrong here?  Yes of course there is something wrong with UBS and financial services system in general. And this UBS episode is just one of many manifestations of it.

Remember UBS is the bank who has dumped so called “risk-free” asset inventory to its customers while executives new that the market was about to collapse.  After it were sued, UBS agreed to repay $19.4 billion plus a 150 million fine. Many other banks were involved in this unethical practice, but it was alleged that UBS management knew the market was collapsing.[2]

Recently The New York Times covered this issue in “At UBS,  a pattern of rogue behaviour” article:
 “The problem isn’t the culture” said a former investment banker. “The problem is that there is no culture. There are silos. Everyone is separate. People cut out their own deals, and it’s every man for himself”.

As expected, New York Times did still not touch the real problem. Let me tell this plainly: The problem is simple: the problem is that UBS still exists! It still exist with this work ethic where "trust" must be a "must"! This is the problem with UBS and many other out dated, mismanagement icons in financial services. Free market forces were actually burying UBS, one of the biggest losers of the 2008 financial crisis, under its wrong bets in mortgage-backed securities. Swiss government bailed them out. They were of course too big to fail.

If a mismanaged big loser is brought down by free market forces, its productive assets are captured by better managed winners and its losing, inefficient parts are discarded. Overall net effect is positive because big losers tend to misallocate valuable resources and prevent more efficient companies to flourish which in turn hurts the market. If you bail a big loser out, it will continue to mismanage, misallocate huge resources while it will have unfair power to prevent more efficient companies to have market share.

In financial services, it seems like this basic natural selection is reversed. Although they try to still reflect “alpha male” image, it is becoming very obvious that global financial services industry is a place where “the losers, the least fit, survive” of course in the expense of winners. This is the real problem. UBS should go down the drain like many other “too big to fail” losers. If that has happened, we were probably recovering from the recession of 2008 (which itself was nothing more than a free market force to bring these big losers down to open way to more efficient and productive firms).  But we have instead printed money to save them all, Helicopter Ben gave secret funds when openly given trillions was not enough, and as expected (if you only read main stream media I am sure you were not expecting) nothing recovered except the stock markets and bonuses given to big losers. And the month free money ended, everything went down immediately. And this comedy of reverse natural selection is going on. They want now require productive European tax payers to rescue idiots who pumped billions to a country which has no way to pay the money back. Tactic is same. If we fail you will burn in hell!

What is wrong with these companies? Or rouge traders? The answer is simple. They still exist and they still have jobs. This is the problem.

[1] – UBS head not resigning over $U2bn fraud

[2] – At UBS, a pattern of rogue behaviour, New York Times

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