UBS faces lawsuits and investor rebellion

The world's largest asset manager, the investment bank UBS, is facing the most profound crisis in its history, as huge losses, legal battles and a shareholder rebellion place its management under unprecedented pressure.

On Wednesday, an extraordinary general meeting will be held at which board members will be forced to defend their stewardship of the bank, while it emerged yesterday that a state-owned German bank is to sue UBS for "significant" losses on a $500m portfolio of securities, allegedly missold to it by the Swiss-based institution. Some 70 per cent of the securities were backed by US sub-prime mortgages.

HSH Nordbank, a regional bank centred on Hamburg,said that "UBS appears to have condoned actions which benefited only itself, at the expense of its clients". The investments were sold by UBS in 2002 via a vehicle named North Street 4. The claim against UBS willbe filed in New York over thenext few days.

The claim may prove to be the first of many throughout the global financial system and could intensify the credit crunch, as banks become even less willing to lend to one another and seek to "hoard liquidity" in case of vastly expensive lawsuits and other misfortunes.

A number of German landesbanks were tempted to diversify into higher risk asset-backed securities, and may follow HSH's lead into litigation.

The news will be unwelcome to UBS, already in more difficulties than the majority of its peers. Last week UBS surprised the markets and sent its shares sliding with the announcement that it had $26.6bn of additional exposure to the stricken American mortgage market. Losses on US loans pushed UBS into a $4bn (£2bn) loss for 2007. In December the bank warned of a $10bn exposure to sub-prime problems. Its total exposure to risky loans is variously estimated at $80bn to $100bn. The US Securities & Exchange Commission has launched an inquiry into whether UBS correctly marked-to-market its sub-prime securities. UBS manages approximately $2 trillion of funds.

The legal challenges now faced by the bank will add to the pressures on the chairman of UBS, Marcel Ospel, to quit.

Marcel Rohner, the chief executive, has admitted that last year was "one of the most difficult in our history", adding that "UBS expects 2008 to be another difficult year".

UBS has already lost one very senior figure in the last year: Peter Wuffli stepped down as chief executve in July, reportedly because of the poor performance of an internal hedge fund. A few weeks ago headhunters were asked to find a new executive vice-chairman for UBS, with a view to replacing Mr Ospel when he steps down, but withno success.

Even before the latest revelations, Mr Ospel was preparing to come under intense scrutiny at this week's EGM. UBS needs shareholder approval for its plans, revealed in December, to shore up its balance sheet by raising $12bn from sovereign wealth funds in Singapore and Saudi Arabia. Shareholders will vote on the bank's plan to issue convertible notes to the SWFs, and on an alternative, put forward by Profond, a Swiss shareholder, asking instead to raise funds through a rights issue.

Another Swiss group, the Ethos Foundation, is requesting a special audit of UBS and its control procedures.

UBS say that if the rebels get their way it will have a negative impact on the bank's regulatory capital ratios and creditratings. Many think the reputational damage is already farmore severe.