Start at the Top for Answers on UBS Losses

When pressed by extreme stress, do you, as a leader, stay and fight or fly the coop?

UBS CEO Oswald Grübel reacted to the bank's "rogue" trader scandal in the same way as another European former bank chairman did when faced with a similar scandal a few years ago.

Defiantly.

Grübel told Der Sonntag,"If someone acts with criminal intent, you can't do anything. That will always exist in our job. If you ask me whether I feel guilty, then I say no."

Oswald Grübel previously led Credit Suisse and has a reputation as a tough guy. After retiring, Grübel was asked to take the top job at UBS and help the bank recover from the devastating blows sustained during the 2007-2008 financial crisis.

Grübel has now backpedaled and grudgingly accepted responsibility for the scandal but vows he will not resign. Reuters reported that Grübel said, "he would bear the consequences of the trading loss that was discovered last week but did not want to quit, adding the affair would influence the future strategy of the investment bank." 

The UBS scandal is consistently compared in the media to the Société Générale "rogue" trader scandal uncovered in January 2008. Grübel's ongoing travails may end up mimicing those experienced by Société Générale’s Daniel Bouton.

Bouton, who had been chairman since 1997, renounced his CEO title in 2008 and left the bank in 2009. Resigning was necessary because, he said, the repeated personal attacks on him risked harming the bank. The Wall Street Journal reported recently that, "while senior executives in the bank stayed in their positions in the scandal's immediate aftermath, it blighted their careers...many in the French political community — including President Nicolas Sarkozy — held Mr. Bouton responsible and urged him to quit as chairman, too.

Bouton's initial position — that "rogue" trader Kerviel had acted alone and the bank's controls were adequate — eventually unraveled.

There were reports that Eurex, the German derivatives exchange, had raised an alarm about Kerviel's positions to Société Générale in November 2007. Kerviel himself told Der Spiegel in an interview last November that Société Générale senior management knew and approved of what he was doing and had removed the brakes so he could proceed at full speed.

SPIEGEL: "Supervisory bodies issued 70 risk alerts to Société Générale."

KERVIEL: "In reality, there were many more warnings. But the higher-ups had gotten deeply involved in the speculation themselves. There were limits in terms of how much exposure each individual trader could take on, but no one paid any attention to them. Like I already told you, my supervisors had deactivated the system of alerts on my computer."

The investigation, conducted by PricewaterhouseCoopers on behalf of Société Générale, highlighted "a mismatch between the resources allocated to support and control functions and the level of front office activities. A lack of seniority also diminished the effectiveness of the back and middle office teams."

Similar reports on the UBS losses will be produced by a Big Four auditing firm on behalf of Swiss and British regulators, though it's not clear which one. The Financial Times said Deloitte — not coincidentally one of Société Générale’s dual auditors with UBS auditor Ernst & Young — has the gig but another U.K. paper, The Independent, says the assignment went to KPMG. UBS will also produce a report after its own internal investigation.

Deloitte's investigation will start at the top with an assessment of controls, as an auditor would when checking support for the CEO and CFO certification of the financial statements each quarter. Investigators look at the example set by bank leadership and the board. Is the "tone at the top" supportive of risk management and internal controls or are controls portrayed by executives as obstacles to success and roadblocks to efficiency? Are the controls and risk management practices adequate to prevent, or at least detect, such significant trading losses early?

Don't be surprised if Deloitte finds the "tone at the top" hasn't changed much since the Société Générale scandal. Corporations, especially global banks, are obviously not learning from past mistakes and failures. There's no money in that. Competition, and desire for windfall profits and rewards, pushes banks to constantly place shareholder capital — and their employees, communities, vendors, and customers — at risk. Some bankers believe failures will never happen at their bank.

UBS CEO Oswald Grübel may soon have to admit he can fail, too.

(UPDATE: Since this post was published, Oswald Grubel resigned.)

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.