Outlook: Heads are bound to roll at UBS

MARTIN TAYLOR, chief executive of Barclays, is reported to be dismayed at the collapse of his share price. But if Mr Taylor thinks he's got problems, he should take a look at the price of UBS, Europe's largest bank. Down another 15 per cent yesterday, the shares have fallen all the way from 650 Swiss francs on 4 August to 270 by last night's close.

In part this is down to the general malaise in the banking sector, but in UBS's case there's an extra dimension. Last week the bank disclosed a SFr950m provision against its investment in John Meriwether's Long-Term Capital Management. The discovery of this exposure is the cause of bitter recriminations within the bank, for both in size and substance it went way beyond that of anybody else.

As part of what was supposed to be a normal trade, UBS bought a large part of Mr Meriwether's interest in LTCM, and that of other partners, the supposed reason being so that Mr Meriwether's gain could be counted as capital rather than income for tax purposes. This position went completely unhedged, with the result that when the balloon went up, it was UBS that was left holding the baby. Forget all those stories about Mr Meriwether and others facing personal bankruptcy; actually they are sitting pretty on UBS's money.

UBS was formed out of the recent merger of Union Bank of Switzerland and Swiss Bank Corporation, owners of Warburg Dillon Read. As it happens, it was the UBS part of the group that was responsible for the LTCM investment.

It had nothing to do with the old guard at Warburgs or its Swiss Bank parent, although they did know about it at the time of the merger. Whether or not this involvement complied with established UBS rules and practices, the knives are out and heads are bound to roll.

Chief among these could be the chairman himself, Mathis Cabiallavetta. He was chief executive of Union Bank of Switzerland before taking up his present position as chairman of the combined group, and was therefore the ultimate line manager for this and other suspect trades. The Swiss Bank faction is demanding he be held responsible. There's still an outside possibility he'll be able to pass the buck, but the betting is heavily that he'll be the first heavyweight victim of the LTCM affair, possibly before the week is up.

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