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A thing we sometimes do here is hold ad hoc seminars in reading press releases and UBS provided a good one yesterday. When you read this:
UBS announces strategic acceleration from a position of strength
and it goes on to say this:
Group CEO Sergio P. Ermotti said, “This decision has been a difficult one, particularly in a business such as ours that is all about its people. Some reductions will result from natural attrition and we will take whatever measures we can to mitigate the overall effect. Throughout the process we will ensure that our people will be supported and treated with care.”
UBS turned its plan to cut 10,000 jobs into reality when it prevented dozens of London-based employees from entering its offices on Tuesday.
Some of the Swiss lender’s fixed income traders discovered that their passes were no longer working when they tried to get to work at its Finsbury Avenue offices on Tuesday morning, bank insiders said. … “I was glad to see that my pass was working this morning,” said one banker who made it into the offices.
Were you? Why?
As the Financial Times reported last week, the investment bank’s fixed income operations, which have largely been rendered uneconomic by the tougher capital requirements and subdued market environment, will be split off into a non-core unit and gradually wound down.
The unit, which will initially hold risk-weighted assets worth about SFr85bn, will be run by Carsten Kengeter, who will step down from his position on UBS’s executive board and post as co-head of the investment bank, leaving Andrea Orcel in sole charge of the division.
Despite the ironies there is something to be said for Ermotti’s claim that UBS’s FICC business is all about its people. It’s not about the money! Here are FICC net revenues for the past few years:
Shares were up almost 6% yesterday on this restructuring and this:
From this point onwards, UBS will implement an attractive capital return program. UBS will have the flexibility to determine a baseline dividend set at a sustainable level, regardless of the normal economic fluctuations. In addition, UBS intends to add supplementary capital returns, which take into account its need for investment and any counter cyclical buffer it chooses to maintain for a more challenging economic environment. UBS believes it can sustain and grow its future business organically with a total payout ratio of 50% or more, taking into account the baseline dividend and any supplementary payments it may make.
It can’t come as that much of a surprise to anyone – see that graph! – that shareholders would prefer a Swiss franc in their hands to a Swiss franc in Carsten Kengeter’s hands, never mind Kweku Adoboli’s hands. Who does a UBS FICC trading operation primarily serve? Possibilities include clients, shareholders, or employees. Clients – without a FICC business, how will UBS sell its corporate clients rates derivatives? – are a possible but unlikely answer; per the press release new UBS will be “more focused on serving its clients” and it seems like it’ll retain clienty stuff like flow rates business. Shareholders can I think easily be ruled out; FICC has lost them ~CHF 10bn over the last eight years, and for the more EMH inclined of you just look at the stock price.
That leaves employees. Based on that keycard guy and our correspondents it seems like UBS’s 10,000 expendable FICC employees would prefer to remain employed at UBS, though you may wonder if the people who are left feel the same way. But it’s not just them; I found this from the press release interesting:
Further, the Investment Bank’s reduced complexity and size will also enable a simplification of the Group as a whole, including the Corporate Center, where excess management layers will be removed and spans of control increased. A reduced real estate footprint and more focused technology requirements will also lower costs. This will be supported by the launch of an independent buying entity which will gain further efficiencies.
One model you can have for this is that FICC trading is a swashbuckling, high-margin business in the right hands, which means that in the wrong hands you can go ahead and treat it that way regardless of profitability or lack thereof or opposite thereof. If your bank includes a FICC trading business, that’s awesome for you. You build some excess management layers! You do your buying inefficiently because, dammit, you’ve got a FICC business to run. If you’re just doing wealth management and ancillary businesses, that’s harder to justify.1
Two other not-very-meaningful but evocative numbers struck me. First, from UBS’s presentation:
Note that that CHF 10 billion of operational risk does not include the residue of Kweku Adoboli’s delta-one equities business, or the stock-trading business that somehow lost $350mm on the Facebook IPO. Equities will thrive under the new regime as a source of operational risk. Not sure about Libor manipulation, though “flow rates” will remain in core. Lines of business where UBS is subscale or second-best get the axe; lines of business where UBS demonstrates market-leading ineptitude can stay.
Second, you can’t really attribute meaning to goodwill numbers, but this bit from the Investment Banking division in the 3Q financial report was kind of weird:
Again, not to take goodwill too seriously, but: last quarter UBS’s investment banking franchise value for accounting purposes was CHF 3.2 billion; today it rounds to zero. UBS’s market value was up by almost CHF 3 billion on that change. Ignoring mathematical and accounting possibility, it’s almost like the value sucked from that franchise went right into shareholders’ pockets. Which is kind of what actually happened.
UBS takes swift action on job cuts [FT]
UBS to Cut 10,000 Jobs in Major Overhaul [DealBook]
UBS to slash 10,000 jobs in fixed income retreat [Reuters]
“UBS announces strategic acceleration from a position of strength” [UBS]
UBS’s third-quarter 2012 results [UBS]
Third Quarter 2012 Results & Strategy Update [UBS]
Earlier: Layoffs Watch ’12: UBS Tells Employees Not To Bother Themselves With Figuring Out How To Get Into Work (Ever Again)
1. This fits with the basic heads-I-win-tails-you-lose model of banking incentives, in which bankers are incentivized to increase volatility because comp is an option on revenue: large positive revenues = high comp; large negative revenues = zero, not negative, comp, and often not even zero. A relatively volatile business like taking balance-sheet FICC risk not only increases the option value of your comp but also increases your importance, managerial responsibility, and other forms of non-monetary remuneration. I DON’T HAVE TIME FOR THIS SHIT, you say, I’VE GOT NINETY BILLION FRANCS OF FICC RISK TO MANAGE. The riskier it is, the louder you can say that.