Sunday, January 18, 2009

UBS shows the way?

The Swiss banking giant UBS, one of the first affected by the US sub-prime meltdown, may be one of the first to start its climb back from the depths. In the aftermath of the crisis, UBS underwent restructuring process that has cleaned up its books and met the newer regulatory requirements, all of which reflects in its relatively better performing share prices. Apart from standard restructuring measures like top management makeover and lay-offs, UBS also introduced a few other important reforms

1. UBS entered into an deal with the Swiss Central Bank to house up to $60 billion of UBS’s bad assets in a separate entity, and thereby clean up its balance sheet. This is similar to the "bad bank" idea that policy makers in the US have been tinkering with.
2. It has shrunk its books, not by the now common route of write-downs and asset transfers, but by selling off its short-term trading assets and moving out of it.
3. It is in the process of spinning itself off into three autonomous parts - wealth management, investment banking and asset management. This seeks to partially address the distortions arising from the cheap internal funding of its investment banking operations and other conflicts of interests. As part of this reorganization, UBS's core, market leading wealth management business has regained focus, and it is ditching proprietary trading and concentrating on client-focused activities,
4. It has embraced a new set of pay policies that include the idea of a "malus", or negative bonus, a way of clawing back deferred compensation in the event of poor performance.

Citigroup and Bank of America would do well to learn lessons from the UBS experience.

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