Knives out in UBS boardroom shake-up

A FAR-REACHING management shake-up will be unveiled today at Union Bank of Switzerland, Europe's biggest bank, after a bitter internal row over who was responsible for the bank's $650m loss from the near-collapse of the Long-Term Capital Management hedge fund.

Last night sources close to the bank said the chairman, Mathis Cabiallavetta, was fighting for his survival after giving his approval to the complex derivatives transaction with LTCM which was the source of the losses.

These sources said other board-level casualties could include Werner Bonadurer, the chief operating officer, and Pierre de Weck, the chief credit officer. Other line managers directly involved in the transaction are also likely to go.

Details of the shake-up, which follows an internal inquiry and an investigation by the Swiss Banking Commission will be announced at a press conference to be held in Zurich this morning.

The transactions at the centre of the investigation involved a $266m outright investment in Long-Term Capital Management and a further covered call option of $800m. These were submitted to the UBS board and approved on at least three separate occasions.

The $266m stake was held in the UBS treasury account and the covered option, which gave a net equity position in LTCM of $320m, was held in UBS's trading book, rather than as straightforward equity investments, something that the Swiss Banking Commission, for one, regards as highly irregular.

The first approval was in February 1997. Sources close to the transaction say it was also approved after the merger with SBC by the enlarged UBS board, as recently as last May.

Marcel Ospel, UBS chief executive who has sought this week to distance himself from the deal was, these sources say, also fully aware of the transaction last December when he approved plans for the merger of SBC with UBS.

The transaction was introduced to UBS by a former managing director of the bank, Ron Tanenbaum, as long ago as October 1996. He knew many of the LTCM people from his previous time at Salomon Brothers. However, it had to be approved by four tiers of management including the global head of risk, Felix Fischer.

Such was the importance of LTCM to UBS - sources say it was making $20m profits out of the relationship - that Mr Tanenbaum held the position of global relationship manager for LTCM. UBS had been keen to buy a stake for some time, and the complex structure helped LTCM to avoid paying tax.

However, friends of Mr Tanenbaum fear he is being made the fall guy for decisions much higher up the chain. Among those who also would have approved the deal are Hans Pieter-Bauer, former global head of equity derivatives at UBS, who left in June, apparently to set up his own hedge fund.

Mr Tanenbaum who left earlier this year for Rabobank was travelling yesterday and unavailable for comment.

Also likely to suffer, supporters say unjustly, is Mr Fischer, the global head of risk, although he may be spared resignation because of a close relationship with Marcel Ospel.

In addition to the write-off of $650m in the value of UBS's stake in LTCM, UBS has now agreed to stump up $400m for a 10 per cent holding. But the real cost is not so much in pure cash as in reputation.

There has been huge animosity between rival factions within UBS and SBC since the two banks merged last December.

For many inside the bank, the revelations that "Cab", as Mr Cabiallavetta, 53, is known, knew about the transaction provides an opportunity to settle scores. Mr Cabiallavetta came from the UBS side but according to insiders he has managed to alienate both his former UBS colleagues and his new associates from SBC who never quite hid their contempt for UBS's management style.

Staff many of whom bore the brunt of years of UBS's poor management, traded anti-Cab jokes. One ditty to the tune of "Away in a Manger" which was much quoted after the merger started "No way it's a merger, UBS has been sold" and ended: "Here's to Cabiallavetta, who's destroyed at a stroke/ Switzerland's largest bank while he was going for broke."

To some the machinations bear the fingerprints of Marcel Ospel, currently chief executive, who is credited with engineering SBC's meteoric rise to prominence as a major force in investment banking. Mr Ospel has never ceased to hide his contempt for UBS and his joy when the bank engineered the takeover of its Zurich based rival last year.

Although sold to the media and to staff as a merger of equals, the fact that the merged bank took on UBS's name was a sop to the rival bank. After the merger some 13,000 jobs were axed, 2000 alone in London where the expendable included top Extel-rated banking analyst Jon Aitken. The bloodletting has left scars too among surviving UBS hands, who will not be shedding many tears for those whose heads are now to roll.

UBS, which had spent vast sums in the quest to establish itself as a serious contender in the global investment banking stakes, had sustained serious derivatives losses and was in no position to resist Mr Ospel. The bank had been harried for years by Martin Ebner, the maverick Swiss banker who over time built up a significant stake in UBS and was a constant feature at UBS general meetings, attacking its failure to match the rates of return notched up by the US investment banks.

To cap it all UBS had lost the propaganda battle in the US over its role in the Nazi gold scandal and was under serious threat of being blacklisted by American clients.