Bloomberg
Swiss Must Save UBS’s Bonus Pool or Die Trying: Jonathan Weil
By Jonathan Weil - Sep 21, 2011
Ever since UBS AG (UBSN) disclosed its latest gigantic loss, due to a supposedly rogue trader in London, the financial press has been obsessed with digging out trivial details, such as what the scandal means for the future of global banking regulation and whether it will cost UBS Chief Executive Officer Oswald Gruebel his job.
Then there’s the real story. Inside UBS’s vast investment- banking operation, we can pretty well guess there’s only one question that matters: “Does this affect my pay?” The short answer is it might. Only it doesn’t have to be this way.
On Sept. 19, Bloomberg News published an article under the headline, “UBS Bonuses at Risk as $2.3 Billion Trading Loss Erases Profit.” As you can see, this year’s UBS bonus pool isn’t doomed, per se. It’s “at risk.” And where there’s a risk there’s always a way. What the UBS bankers need is a plan to ensure that the people who bear this loss are people other than themselves.
Luckily, I have prepared one. To save the UBS bonus pool, UBS’s leaders must persuade the people of Switzerland to eat the losses the company is blaming on Kweku Adoboli, and to do so with joy in their hearts. Impossible, you say? Consider the following talking points:
No. 1: Reimbursing UBS for the $2.3 billion would be an investment in the country’s future.
Surely it will cost Swiss taxpayers much more money later if they skip paying this small ante now. UBS’s writedowns during the last financial crisis topped 50 billion francs ($56 billion).
To keep UBS afloat, the Swiss government put up 6 billion francs of bailout dough and took almost 40 billion francs of rotting assets off the company’s books. Better for the Swiss to nip these new “rogue trading” losses in the bud while they can.
No. 2: If the bankers don’t get their bonuses, the best and brightest UBS employees will leave for competitors.
Somebody has to stick around to clean up the mess being pinned on Adoboli. The Swiss must decide: Do they really want all of UBS’s best talent to leave for National Bank of Greece? Or worse, Deutsche Bank? This, too, would inevitably lead to even bigger losses later, which brings us to our next point.
No. 3: UBS isn’t actually a bank.
The Swiss government is the bank here, not UBS. In reality UBS is an off-balance-sheet SIV, or structured-investment vehicle, backed by the Swiss government. UBS shareholders and employees are the SIV’s “first-loss holders,” as they’re known in the trade. (UBS bondholders, as we all know, are prohibited by international law from incurring losses.)
Normally the first-loss holders would exist to serve as a buffer, like swampland absorbing the storm surge from a hurricane, except these aren’t normal times. The better off the first-loss holders are, the safer the world will perceive UBS to be. So when the Swiss people rescue the UBS bonuses, what they’re doing is restoring the first-loss cushion to its rightfully bloated condition. And by doing so they’re saving themselves.
No. 4: Rescuing the bonus pool promotes Swiss competitiveness.
Anyone with even a passing knowledge of international debt markets knows that the price of Swiss government bonds has become ludicrously expensive. The flight into Swiss francs earlier this year has made life miserable for Swiss exporters. A standard-issue Rolex costs more than a five-bedroom house in Detroit.
Viewed in that light, it could reasonably be argued that UBS isn’t losing anywhere near enough money to meet Swiss society’s needs. UBS finished last year with $1.4 trillion of assets, almost triple the size of Switzerland’s $524 billion annual gross domestic product.
Rather than purchasing unlimited quantities of foreign currencies to stop the franc from strengthening, a more efficient approach would be to tell the world that UBS is in grave danger of failing and that the Swiss people are eager to pay UBS bankers whatever bonus money is needed to turn the government’s budget surplus into a crippling deficit. With one bold gesture, the franc would plunge to new depths. Yields on Swiss government bonds would soar. And all of Switzerland would be richer for it.
No. 5: This is a matter of fairness.
When poor people lose their money, it’s a tragedy. There are so many of them, and they had so little to start with, there’s not much government can do, unlike with the wealthy.
So the question must be answered: Is it really fair that hundreds of high-net-worth UBS professionals should pay for the alleged sins of a lone 31-year-old Ghanaian trader, just because they failed collectively to oversee him?
The U.S. let American International Group Inc. (AIG) pay more than $400 million in employee bonuses after that company’s $182 billion government bailout. Shouldn’t UBS bankers have available to them the same kind of social safety net that exists for others of their class? Discuss.
No. 6: The fundamentals of capitalism are at stake.
To paraphrase a line from AIG’s rescue plea, government backstops are the oxygen of the free-enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined, and we would all be on the road to serfdom.
The failure of the UBS bonus pool at a time of major global and economic instability would exacerbate the challenge of reigniting consumer confidence. Because Swiss banking has changed greatly in character over the last decade -- from just a basic provision of tax-evasion services to a vehicle for massively leveraged speculative wagering -- the effects of disrupting the industry are wide-ranging and significant.
The message for Switzerland is simple: You can’t fix the UBS bonus pool unless you save it first. I’m confident the Swiss will do the right thing.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
To contact the writer of this article: Jonathan Weil in New York at jweil6@bloomberg.net.
To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.
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