UBS announced earnings today and I tell you, it is hard work to get people to focus on the strong fundamentals of your business when you keep distracting them with enormous screw-ups. Today’s:
Due to the gross mishandling of Facebook’s market debut by NASDAQ, we recorded a loss of CHF 349 million [$356mm] in our US Equities business as a result of our efforts to provide best execution for our clients. As a market maker in one of the largest IPOs in US history, we received significant orders from clients, including clients of our wealth management businesses. Due to multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours after the stock had commenced trading. As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from NASDAQ were received and our systems were able to process them. NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered. UBS’s loss resulted from NASDAQ’s multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties.
Once upon a time two months ago Felix Salmon said “The fact is that if UBS ended up losing anywhere close to $350 million on Facebook stock, it has no business being in the equity capital markets at all,” and I laughed, and, um, well, how do people feel about that today?
Derek De Vries, an analyst at Bank of America Merril Lynch, said: “The question about UBS has always been: can the investment bank sustain a return on equity above the cost of equity? Clearly the second quarter was not a great environment, but if anything the numbers suggest that the answer is no.”
The results were rather weak and were once again dragged by a disappointing performance of the investment bank, Bank Sarasin analyst Rainer Skierka said. It raises “questions on where the value is for shareholders” when it comes to this unit, Mr. Skierka added.
Indeed. UBS actually seems to have destroyed value with near maximum efficiency: it traded about 100mm shares on the day of the IPO; if UBS’s traders bought all 100mm shares at the $42 open and sold them all at, say, the $38.38 VWAP over the last hour of trading (after, I guess, it figured out it had a lot more shares than it wanted) that would produce a $365mm loss – pretty close to the actual loss, without any of those shares actually going to customers. Perhaps they had orders for 1mm shares and managed to put them in 100 times?
Peter Thal Larsen points out that, despite the series of awkward headlines, UBS is penitently continuing to shrink and de-risk its investment bank and focusing on its core strengths of wealth management and tax dodging. This has not, however, seriously impacted UBS’s ability to lose comical amounts of money in otherwise calm areas: without ever writing $100bn of CDX as a macro hedge gone awry, UBS has managed a series of multi-hundred-million-dollar losses in places where you’re really not supposed to lose money.
Losing $2bn in your delta-one swaps business is forgiveable; that should be a pretty low-risk area but it’s a historical haven for rogue traders. Being fined $160mm over municipal bonds, normally among the sleepiest and most conservative of the capital markets, is embarrassing but, again, they’re far from alone.
But large-scale inability to buy and sell highly liquid U.S. listed equities for wealth-management clients is a particular black eye, and blaming Nasdaq doesn’t really make up for it: Nasdaq screwed up for everyone, and Knight and Citadel also lost millions of dollars, but no one lost money with the comprehensiveness and panache of UBS. Everyone’s systems were screwed by Nasdaq, but everyone else had systems that were robust enough to not lose half their quarter’s net income in one day because of the screw-up.
If you’re a UBS shareholder you might be relieved that the bank is renouncing its former efforts to be a global investment banking powerhouse. But you might not be entirely comfortable with its efforts to hang a small but inept investment bank on its more robust wealth management franchise. Yes, making markets in hot IPO stocks does provide a service to those wealth management clients, and no doubt they appreciate it. It’s less clear that they appreciate it $356mm worth. And when equity market-making is not your focus and your profit center, you perhaps focus less on attracting talent to that business and getting the systems and supervision right. And then, every so often, you lose $356mm for no apparent reason and end up with a net loss in your investment banking business, leaving your analysts to wonder why you have that business at all. Perhaps if it’s not worth doing well, it’s not worth doing at all?