UBS AG (UBS) plans to separate its investment banking and wealth management units after reporting a fourth straight quarter of widening losses and mounting subprime-related write-downs.

UBS announced yesterday (Tuesday) that it lost $329 million in the second quarter after taking another $5.1 billion hit in write-downs on subprime assets. That compares with a profit of $5.12 billion a year ago. The bank has written down a total $42.5 billion in the past 12 months.

After announcing its results, UBS said it would “reposition” itself to “allow maximum strategic flexibility in its future development.” The restructuring effort includes separating the bank’s business divisions into three autonomous units, as well as a management shakeup. Four new members will be added to the bank’s Board of Directors, and Markus Diethelm and John Cryan will take over as Group General Counsel and Group Chief Financial Officer.

"We are delighted that Markus and John will join our Group Executive Board, and, when it is formed, the new Executive Committee, filling these critical positions with two high-caliber senior managers," said Chief Executive Officer Marcel Rohner.

Both the turnover in management and abandonment of the single-bank model are widely seen as moves to appease investors who are growing impatient with UBS’ continued losses. However, analysts remain divided over whether or not the bank will go so far as to jettison its securities unit.

“We believe that UBS investment bank will be not fully owned and even potentially disposed of by UBS over the next two years,” said JPMorgan Chase & Co. (JPM) analyst Kian Abouhossein.

However, the UBS Chairman Peter Kurer told journalists on a conference call that the bank has “no specific plans to dispose of any business unit at this time,” leading others to speculate that the bank is merely trying to pacify its raucous investors.

“They bought themselves some time,” said Joerg de Vries-Hippen, who oversees about $26 billion, including UBS stock, as chief investment officer for European equities at Allianz Global Investors (ADR: AZ), told Bloomberg News. “By separating the business units they are showing that they are listening to investors but not going as far as breaking up the universal bank business model.”

It’s not just investors the bank is worried about losing, either. UBS lost 140 client advisors from management units in the second quarter, Bloomberg reported.

“Talent in private banking is rushing out the door to competitors who are taking advantage of the bank’s difficult situation,” said Bernhard Bauhofer, the founder of Wollerau, Switzerland-based consulting firm Sparring Partners GmbH.

Clients have followed many of those executives out the door, as the company said there were net new money outflows of $41 billion during the second quarter.

“A big part of the money outflows were international,” Helmut Hipper, a fund manager at Union Investment told Reuters. “The reputational problems are hitting home internationally.”

An investigation by the Internal Revenue Service has also detracted from UBS’ credibility. The IRS has issued a summons for customer information, alleging the bank helped clients evade U.S. taxes. UBS said it would stop servicing American accounts, and the Swiss Finance Ministry is evaluating whether or not the bank should offer any further compliance.

Also, New York State Attorney General Andrew Cuomo has brought a multi-billion lawsuit against UBS, accusing the Swiss banking giant of pushing billions of dollars in auction-rate securities onto ordinary investors as the market collapsed earlier this year.

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By Jason Simpkins
Associate Editor

New York State Attorney General Andrew Cuomo has brought a multi-billion lawsuit against UBS AG (UBS), accusing the Swiss banking giant of pushing billions of dollars in auction-rate securities onto ordinary investors as the market collapsed earlier this year.

UBS routinely presented the troubled auction-rate securities as safe, short-term liquid investments even as a senior executive at the bank called the market “a complete loser,” the civil complaint filed by Cuomo alleges.

The suit is yet another blow for the Zurich-based bank, which is also under investigation by U.S. Department of Justice to determine whether UBS helped American clients dodge paying U.S. taxes.

“Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behavior will not be tolerated,” Cuomo said.

Auction-rate securities are preferred shares or debt instruments such as corporate or municipal bonds. They have a long-term maturity and are sold at monthly or weekly auctions, and until recently were treated by many investors as cash investments. However, in February, the auction-rate security market collapsed, bringing auctions to a halt and leaving investors with $330 billion in illiquid investments.

UBS halted auctions on Feb. 13, leaving more than 50,000 of its customers with $37 billion in unmovable auction-rate securities, according to Cuomo’s filing. The lawsuit further alleges that UBS officials knew the market was under considerable strain as early as December and began unloading the debt to ordinary investors. Seven executives sold $21 million of their personal holdings in the market to avoid losses, the complaint says.

"Once they knew the auctions were failing, they removed their personal money and corporate money from the auctions and were still bringing consumers into the auctions," Cuomo said. “You can’t have two sets of rules – one set of rules for customers and one for senior officials.”

No charges have been filed against individuals, but the state of New York is asking that UBS buy the securities back from its customers at face value.

“They want their money back,” Cuomo said. “My job is to get their money back.”

UBS has denied any allegation that there was a widespread effort to move its inventory of auction-rate securities from its books and insisted that investors were fully informed of the risks associated with the purchase of said securities.

“We will vigorously defend ourselves against this complaint,” UBS said. “It is frustrating that the New York attorney general has filed this complaint while we have been fully engaged in good faith negotiations with his office to bring liquidity to our clients holding auction-rate securities.”

New York is the third state to take action against UBS over its auction-rate market, as William Galvin, the secretary of the Commonwealth of Massachusetts, and the Texas State Securities Board have also brought litigation against the bank. However, Cuomo’s case could pose a bigger threat to UBS, which has its bond desk in New York. Cuomo could, in effect, bring a case against the bank on behalf of UBS customers everywhere.

Bank of America Corp. (BAC), Merrill Lynch & Co. Inc. (MER), and Wachovia Corp. (WB), which recently had its St. Louis offices inspected by Missouri state securities regulators, could also face litigation over auction-based securities in coming months, the International Herald Tribune reported.

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UBS AG (UBS) yesterday (Tuesday), announced it had obtained a license to operate in Saudi Arabia, joining a growing number of financial firms looking to recoup some of the over $400 billion in global write-downs to date by tapping into the oil-fueled wealth creation occurring in the Middle East.

 ”With over 40 years’ experience in the region our decision to set up operations in the Kingdom of Saudi Arabia is further evidence of UBS’ long-term commitment to the Middle East and marks yet another important milestone for the firm in this very exciting and significant market,” Chairman and Chief Executive John Fraser said in a company statement announcing the planned expansion.

UBS expects to have wealth management, asset management, and investment banking services up and running in Saudi Arabia before year-end, a company representative told the AFP.

The largest Swiss bank, UBS also is looking to obtain rights to operate in Qatar Financial Centre, and is in the process of setting up a regional equities research team based in the United Arab Emirates as part of its Middle East expansion.

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“We are making an investment on the progress of the region,” said Peter Burnett, chief executive for UBS Investment Bank in the Middle East and North Africa, The Financial Times reported. “They have petrodollars flowing in and are in the process of enormous wealth creation.”

UBS joined other financial firms in setting up a Middle East regional office in the Dubai International Financial Centre in early 2007. The firms are looking to capitalize on the estimated $4.3 trillion in oil profits that will flow into the Gulf region over the next four years if oil remains at its current elevated price.

UBS expects to see growth in capital markets business, advisory work and infrastructure projects in the Middle East, regional head Burnett told The FT. UBS has already undertaken a  joint venture with sovereign wealth fund Abu Dhabi Investment Company to manage Middle East-focused infrastructure funds, he added.

UBS Targets Middle East Infrastructure Expansion

UBS is not alone in targeting the wealthy Middle East. The bank currently ranks fifth in the region according to Bloomberg data, with Goldman Sachs Group Inc. (GS) in the top spot. Other rivals already operating in the Middle East include Citigroup Inc. (C), Lehman Bros. Holdings Inc. (LEH), and Deutsche Bank AG (DB).

In 2007, the six nations of the Gulf Cooperation Council – Saudi Arabia, Kuwait, Bahrain, Omar, Qatar and the United Arab Emirates – earned $381 billion from oil exports and that was before oil prices rocketed up to over $145 per barrel before dropping back to its current level of $135 per barrel.

The cumulative earnings of the Gulf States will reach into the trillions if oil remains over $100 for several more years. At the moment, the Middle East literally has more money than it knows what to do with, but the governments are well aware that oil reserves can’t last forever.

That’s why so many of those “petrodollars” are flowing into infrastructure projects to cement the Middle East’s place as a tourist and financial center before the wells run dry.

From Dubai to Kuwait, there’s an estimated $2.4 trillion in construction projects either underway or under development in the world’s biggest oil patch. And $1.4 trillion of that is earmarked for projects in civil construction. Current spending on residential and commercial construction projects in the Middle East currently outweighs oil, gas, power, petrochemical, and industrial construction projects combined.

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By Mike Caggeso
Associate Editor

UBS AG (UBS) was at the center of a tornado of crushing news yesterday (Tuesday), as it announced major changes to its board amidst pressure from the U.S. Department of Justice to reveal the names of top clients taking advantage of the bank’s tax breaks.

Four of the No. 1 Swiss bank’s board members – Stephan Haeringer, Rolf Meyer, Peter Spuhler and Lawrence Weinbach – will step down at the bank’s Oct. 2 shareholder meeting.

In the frenzy of troubling news, UBS shares sank to a 10-year low, trading at $19.57 mid-afternoon Tuesday, before recovering slightly to close at $20.35.

The bank has been the biggest European casualty to the U.S. subprime-mortgage crisis. It has written down more than $38 billion in the last three quarters, and its stock has dropped more than 57% year-to-date.

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Continuing that trend, the bank will likely post a second-quarter loss with another markdown of about $4.9 billion, according to Bloomberg News estimates. 

UBS said it will immediately submit board-member recommendations to the governance committee and will explore redefining directors’ and management’s responsibilities.

Identifying UBS’ “John Doe” Clients

The board shakeup comes a day after the U.S. Department of Justice announced an investigation into whether the Zurich-based bank helped American clients dodge paying U.S. taxes.

The “John Doe” summons would allow the Internal Revenue Service to obtain information about unnamed U.S. customers with more than $10,000 in UBS accounts for possibly dumping their money in international accounts to evade taxes back home.

The federal judge handling the case has not yet granted permission to the IRS, but is expected to, said Jack Blum, a partner at Baker & Hostetler LLP and an expert on offshore banking, told Bloomberg.

This is where it gets really sticky for UBS because overseas accounts are one of its biggest revenue streams. Former UBS banker Bradley Birkenfeld, who pleaded guilty in federal court to conspiring to defraud the IRS by helping U.S. clients avoid reporting domestic taxes, said in court in June that UBS had about $20 billion in “undeclared” accounts held by U.S. customers, Reuters reported.

“The bank is in a very difficult position,” Blum said. “If I were advising clients, I’d tell them to come clean; the people who come clean early will probably be allowed to get off with paying the tax, the interest and the penalties. Others could very easily face criminal prosecution.”

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At its annual shareholder meeting yesterday (Wednesday), Swiss bank UBS AG (UBS) announced it would cut expenses, raise additional capital and replaced its chairman.

Speaking before 4,200 shareholders in Basel, Switzerland, Chief Executive Officer Marcel Rohner said the bank would look to reduce expenses, particularly in its investment banking division.

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First created in 1998, the bank’s securities division has earned $32.48 billion (32.5 billion francs) since its inception. That figure has now been completely offset by the $37.5 billion (38 billion) in losses the unit has incurred since the subprime crisis began to unfold last summer.

UBS will "no longer aim to offer everything to everyone in investment banking," Rohner said. The bank would announce job cuts at the unit next month in order to make expenses more compatible with the securities unit’s "new positioning," he said.

In addition to cost-cutting measures, shareholders approved another capital infusion of $15 billion. That’s on top of the $13 billion already raised from sovereign wealth funds in Singapore and the Middle East.

Ospel Ousted

UBS shareholders booed the selection of General Counsel Peter Kurer as the replacement for former Chairman of the Board Marcel Ospel.

Ospel, 58, who started his financial career in securities trading at Merrill Lynch & Co. Inc. (MER) has been lambasted in the Swiss press for overexposing UBS to the U.S. subprime crisis. UBS losses are the largest of any foreign bank.

And while most were pleased to see Ospel replaced, many objected to the selection of Kurer, 58, as his replacement.

"We have heard no justification as to why a credible search for an external chairman has not been undertaken," former UBS President Luqman Arnold, whose London-based investment group currently holds 1.1% of UBS shares outstanding, said in an e-mailed statement, Bloomberg News reported. "We are skeptical whether a supervisory board led by legacy insiders will be the agent of change that UBS needs."

There had been some speculation that Germany-based Deutsche Bank AG (DB) Chief Executive Officer Josef Ackermann might be tapped for the role, as he is a Switzerland native and is seen as having the experience needed to helm a large banking operation facing the type of risk management issues that UBS is confronting.

"At least half of the board should be made up of banking experts," Dominique Biedermann, director of Geneva-based Ethos, who has been very critical of UBS management, said yesterday.

In an attempt to reassure discontent shareholders, Kurer affirmed that UBS is not for sale while acknowledging the monumental task before him.

"I am not here to defend the choice" of the board, Kurer told shareholders. "It is an honor for me to stand in front of you today, but I do so fully aware of the magnitude of the tasks ahead of us, of the work that is required to bring UBS back to the premier ranks of banking."

UBS shares traded on the New York Stock Exchange dropped 2.6% for the day, with a decline of $0.92 to close at $34.46. Shares have traded in a range from $22.19 to $66.26 in the past 52 weeks.

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  UBS Estimates $19 Billion Loss, Chairman Marcel Ospel to Resign

UBS AG (UBS) announced yesterday (Tuesday) an estimated $19 billion (12 billion Swiss francs) loss in the first quarter. As a result of the $38 billion in losses accrued by the Swiss bank since the third quarter of 2007, Chairman Marcel Ospel will step down.

Due to the estimated loss, the bank has been forced to seek another emergency capital infusion, after having already raised $13 billion from sovereign wealth funds in Singapore and the Middle East.

"Behind closed doors they have been cleaning up very swiftly and the capital increase will put them back onto a solid foundation," Joerg de Vries-Hippen, who manages about $26 billion, including UBS shares, as chief investment officer for European stocks at Allianz Global Investors AG in Frankfurt, told Bloomberg News. Still, "it will take years to repair the bank’s reputation," he said.

UBS had already segregated most of its assets related to U.S. mortgage-backed securities into a portfolio workout unit for risk management purposes, to separate high-risk positions from its other, profitable, businesses. In a statement yesterday, UBS announced that it would "form a new entity to hold substantial parts of the work-out portfolio, which will initially be wholly owned and financed by UBS."

Ospel, 58, who started his financial career in securities trading at Merrill Lynch & Co. Inc. (MER) has been lambasted in the Swiss press for overexposing UBS to the U.S. subprime crisis.

"His time is over. You cannot preside over a disaster like this without accepting responsibility," said a rival banker, who spoke with Reuters on condition of anonymity.

The bank has nominated UBS General Counsel Peter Kurer as Ospel’s replacement. Voting will be held at the next board meeting, slated for April 23.

Ospel’s departure is the latest in a string of financial executives who have been ousted due to mounting subprime-related losses. The Bear Stearns Cos. Inc. (BSC) former Chief Executive Officer James E. "Jimmy" Cayne stepped down in early January, but remained on as Chairman. Charles O. "Chuck" Prince III was ousted from Citigroup Inc. (C) in early November to be replaced by Vikram Pandit. And former Chief Executive E. Stanley "Stan" O’Neal, of Merrill Lynch retired at the board’s urging in late October.

"With these measures we have created the basis to weather one of the most difficult periods in the history of the industry, " UBS Chief Executive Officer Marcel Rohner said in the statement.

Investors welcomed the news of Ospel’s departure. UBS shares traded on the New York Stock Exchange rose over 14% for the day, with a gain of $4.23 to close at $33.03.

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 Shares of Yum! Brands Inc. (YUM) gained 4.25% yesterday (Monday) after UBS AG (UBS) raised its rating to "Buy" from "Neutral."

The Kentucky-based Yum!, which owns such well-known brands as KFC, Pizza Hut and Taco Bell, has been doing very well in overseas markets, particularly China. And it has been on a push to increase domestic sales by revamping U.S. menus, increasing breakfast options and reducing company ownership through a refranchising program of its KFC and Pizza Hut brands, The Associated Press reported.

In a note to clients, UBS analyst David Palmer said that "while some investors have expressed concerns that the U.S. refranchising appeared to slow versus company guidance in 2007, we expect to see that trend reverse in 2008 and 2009."

"We believe the end result for Yum will be a faster-growing, more-international, higher-return company by 2010 – with 40% or more of its enterprise value coming from its rapidly growing China business," he added.

Earlier this month, Yum! announced fourth-quarter earnings that were flat, although strong international growth helped offset the weak domestic results. System-wide sales grew 42% in China and 16% for Yum! Restaurants International (YRI) in the fourth quarter. For the full year, operating-profit growth in China and YRI helped to offset a 3% decline in the United States.

The domestic market was the weak spot in an otherwise strong earnings report. The increase in same-store sales open for at least a year was not enough to boost operating profit, which fell 1% from the prior year due to higher commodity and labor costs.
Shares increased $1.48 yesterday, to close at $36.33.

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UBS AG (UBS), Europe’s largest bank, and Abu Dhabi Investment Co. (ADIC), the United Arab Emirate’s state-controlled sovereign wealth fund, announced they will start a $500 million joint venture that will invest in infrastructure projects.

Much of the fund will focus on utility, transport, social and energy-related projects in the Middle East and North Africa. ADIC chairman Khalifa al-Kindi told reporters he expects the fund to launch in the first half of this year, Gulf News reported Monday (yesterday).

"The [Middle East and North Africa] region is going through a phase of profound expansion which has led to an increased demand for infrastructure to support continued growth and the fast growing populations," Khalifa al-Kindi said.

"The bringing together of a major regional and a major global player with excellent deal sourcing and deal execution abilities will put us in a tremendous position to take advantage of the significant investment opportunities in the regional infrastructure market."

That is further evidenced by the fund’s annual target return rate of 15% to 20%. The fund will be open to all investors and from them the fund hopes to achieve its $500 million goal, Bloomberg reported. If all goes according to plan, that figure could be as high as $500 billion sometime in 2008, al-Kindi said. 

Other European banks have made similar deals recently.

In November, HSBC Holdings PLC (HBC) partnered with Dubai International Capital LLC and Oasis International Leasing Co., raising a $300 million fund to invest in Middle East and North African projects. A month earlier, Deutsche Bank (DB) and Abraaj Capital Ltd. said they raised $1.2 billion for a Middle East and South Asia infrastructure fund, Bloomberg reported.

The Abu Dhabi-UBS venture also follows a string of outside investments made by Middle Eastern sovereign wealth funds whose government-controlled bankrolls grabbed sizable stakes in blue-chip companies around the world.

• Nov. 27: Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. (C). 

• Nov. 26: Dubai International Capital, a state-owned holding company, acquired an undisclosed stake in Japan’s electronics and media juggernaut Sony Corp. (SNE).

• Nov. 16: Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. (AMD).  

• Oct. 20: Dubai International Capital agreed to invest $1.26 billion in the initial public offering of hedge fund Och-Ziff Capital Management Group LLC (OZM).

• Aug. 22: Dubai World, another investment arm of the state, plunked down $5.1 billion for a 9.5% stake in MGM Mirage (MGM).  

• Aug. 14: Istithmar, part of Dubai World, was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. (JNY).

U.S. and European companies are seeking capital as their economies have slowed [in addition to emerging market opportunities], and Middle Eastern sovereign wealth funds are using that as leverage to invest in them at bargain prices.

And in their race to buy assets around the world, these sovereign wealth funds are finding themselves increasingly competing with each other. Abu Dhabi’s joint venture with UBS probably didn’t go over well with Kuwait – owner of the world’s oldest sovereign wealth fund – which announced a few weeks ago that its would like to invest in capital-starved European banks.  

"We are interested if we are invited" to invest, Bader al-Saad, the fund’s diplomatic managing director, told reporters at the World Economic Forum in Davos, Switzerland, remaining just as mindful of public relations as Saudi Arabia’s al-Jasser. 

Kuwait’s SWF has already invested in U.S. banks with a $3 billion investment in Citigroup and a $2 billion investment in Merrill Lynch & Co. (MER). 
Analysts aren’t expecting a slow down of SWF spending sprees in 2008. On top of more spending from Middle Eastern SWFs, India is taking steps to launch its own SWF. And China just finished taking applications from more than 100 drooling money managers to help invest the country’s $200 billion SWF, China Investment Corp. 

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