Swiss banking giant UBS said Thursday that a rogue trader has caused it an estimated loss of $2 billion, stunning a beleaguered banking industry that has proven vulnerable to unauthorized trades. Police in London said they arrested a 31-year-old man in connection with the loss.
Switzerland’s Neue Zuercher Zeitung, a newspaper widely read in Swiss banking circles, reported the trader worked at UBS’s equities division in London. A spokesman for the bank, Yves Kaufmann, declined to confirm the report.
The Swiss banking regulator Finma said it was in contact with the bank about the incident.
“From the scale of this case you can be sure that it’s the biggest we’ve ever seen for a Swiss bank,” Finma spokesman Tobias Lux told The Associated Press.
Switzerland’s largest bank warned that it could report a loss for the entire third quarter as a result of the rogue trade, sending its shares plummeting.
The alleged rogue trading evoked memories of the 2008 debacle that befell Societe Generale, France’s second-largest bank, which stunned investors when it revealed that one of its staff had lost the bank euro4.9 billion ($6.7 billion) through a complex scheme of unauthorized trades.
The trader, Jerome Kerviel, was convicted in October 2010 on charges of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly euro50 billion between late 2007 and early 2008.
UBS provided little specific information on the incident, saying it was still under investigation and no client money was involved. The unauthorized trades could cost UBS almost as much as the 2 billion Swiss francs ($2.28 billion) the bank said last month it hoped to save by cutting 3,500 jobs over two years.
It comes as UBS is struggling to restore its reputation after heavy subprime losses during the financial crisis that resulted in a government bailout, and an embarrassing U.S. tax evasion case that blew a hole in Switzerland’s storied tradition of banking secrecy.
By coincidence, the Swiss parliament was slated to debate the future of the country’s banking industry Thursday. Lawmakers are being asked to consider proposals to ensure that Switzerland’s two biggest banks _ UBS and Credit Suisse Group _ are brought under tighter control as they are considered “too big to fail.”
Shares in UBS AG plummeted almost 8 percent to 10.07 francs ($11.54) on the Zurich exchange by early afternoon.
In a terse statement shortly before markets opened Thursday, the bank informed investors that “UBS has discovered a loss due to unauthorized trading by a trader in its investment bank.”
“UBS’s current estimate of the loss on the trades is in the range of $2 billion,” it added. “It is possible that this could lead UBS to report a loss for the third quarter of 2011.”
In a letter sent to its employees, the bank said it regretted that the incident came at a difficult time.
“Although the news is regrettable, the fundamental strengths of the company won’t be affected by this,” the note said. “We ask that you continue concentrating on your customers. In these uncertain times they are counting on your support.”
It promised to keep employees briefed on developments in the case.
Peter Thorne, a London-based equities analyst at Helvea, said the loss was financially manageable for UBS, Switzerland’s biggest bank. But he said it was a blow to the reputation of UBS and its management, and reinforced the case of slimming down the investment banking unit.
UBS chief executive Oswal Gruebel recently warned that the bank wouldn’t achieve its aim for a pretax profit of 15 billion francs a year by 2014. UBS earned some 2.8 billion francs during the first half of the year, with the investment bank contributing 1.2 billion before tax.
In the Societe Generale case, Kerviel was banned for life from working in the financial industry and ordered to pay back the vast amount he had caused his employer to lose.
Nick Leeson, a British trader working in Singapore for Barings Bank, made unauthorized futures trades that lost more than $1 billion and led to the venerable bank’s collapse in 1995. The infamous case prompted banks worldwide to tighten their internal checks.
Leeson was released from a Singapore jail in 1998 for good behavior after serving 3 1/2 years of a 6 1/2-year sentence. He claimed he did not make a cent from his disastrous trades but Barings’ liquidators sought the return of 100 million pounds on any of his earnings relating to Barings.
John Heilprin in Geneva and Bob Barr in London contributed to this report.