UBS is scheduled to report its 4th-quarter and full-year results this Tuesday, 10 February (see bottom of posting for information on how you can participate).
Since a full one-third of UBS is in open revolt (clearly the Investment Bank over this bonus flap, and parts of Wealth Management over paying unprecedented "sign on" bonus for teams defecting from distracted competitors such as Citi, Morgan Stanley, BofA Merrill Lynch and Goldmans) and potential "disintegration" (as the Wall Street Journal reported) looming, it should prove to be quite an interesting affair, shouldn't it? Kudos to Carrick Mollencamp at the WSJ for chasing down the real story at UBS, confirming much of what has been written here and publishing it more widely for shareholder and others to review.
So, what to expect Tuesday? Will Chairman Kurer and CEO Rohner even bother to lead the call? Or will they abdicate and let CFO John Cryan do the dirty work? Will they have the heads of the Wealth Management, Asset Management and Investment Bank on hand to answer the tough questions from the research analyst community (it's a dirty little secret in investor relations circles that the management teams leading the calls can see the queue of calls waiting, which enables them to re-order or even reject certain callers whose questions it may not like or has not liked in the past. So much for transparency!)
Whoever turns up to speak with investors ought to familiarize themselves with some alarming statistics. Since the news of the UBS bonus scheme was made public at the end of last week, let's review stock price performance of the major banks for the week of
2 February:
+19.62% Goldman Sachs
+13.26% Credit Suisse
+13.05% Morgan Stanley
+10.16% Barclays
+10.14% Citigroup
+ 9.51% Deutsche Bank
+ 5.56% HSBC
- 6.84% Bank of America
- 9.64% UBS
So, in a week's time, UBS' stock has been outperformed somewhere between 3% and 30% by its major competition. To put this into perspective, had UBS' stock performed only as well as the median of its peers last week, its stock should have risen 10.15%, implying a trading price of $13.71 today. Had that been the case, its market cap would be approximately USD$7.8 billion higher than it is right now (based on a closing price of $11.25 Friday and roughly 3 billion shares outstanding). Nice week, guys. Since it's a commonly held belief that markets are "forward-looking," this is one market that's looking forward for UBS and not liking what it's seeing. Uh-oh.
In light of the above numbers, investors in UBS should want to hear some meaningful information and straight answers to tough questions. Like it or not, investors' shares are nothing more than equity in the good (predominantly) people who work at UBS (for now), as opposed to real estate, plant, equipment, or anything else tangible for that matter. If the place is imploding as a result of actions by management, shareholders have a right to know what the hell these "leaders" are doing and why. You have a right to direct answers to the questions we pose below.
Perhaps some of you reading this should join the call and attempt to ask a question! Hell, if you're a research analyst and would like to borrow any of ours we list below, you're more than welcome....
QUESTIONS ON UBS REPORTED RESULTS:
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1. In the 4th quarter, it is widely rumored that UBS had one specific trade (and perhaps an accompanying, offsetting hedge) that went bad and on which UBS lost a material amount of money.
a. Is that true?
b. As rumored, was Investment Bank CEO Johansson involved in approving it?
2. Similarly, it is rumored that, like Goldman Sachs, UBS had a large loss/writedown (may be disclosed on the call) associated with a loan to Lyondell-Basell.
a. Is that true?
b. If so, is it true Investment Bank CEO Johansson & other senior bankers were key internal supporters and endorsed UBS making the loan?
c. If b. is true, does UBS' Board retain confidence in these managers and were there any repercussions for that failure of judgment?
d. Is there truth to the rumor that Rory Tapner is to be named CEO of the Investment Bank?
QUESTIONS RE INVESTMENT BANK "BONUS POOL" & EMPLOYEE RETENTION:
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1. UBS stated that approximately USD$1.1bn (CHF 1.3bn) of its bonus pool allotment out of a total of USD$1.7bn (CHF 2.0bn) was "contractual" which constitutes approximately 67% of the total bonus pool.
a. How many bankers will share the USD$1.1billion (in other words, what is the size of the average "contract")?
b. Given 67% of the bonus pool must be paid contractually, what percentage of total employees do those receiving a contractually-guaranteed bonus represent? In other words, 67% of bonus is being paid to what percentage of employees?
c. Is UBS willing to release the specific amount of each of these bonuses being paid to those receiving "guaranteed compensation," given the discriminatory nature of the compensation and the fact the Swiss National Bank had to "bail out" UBS? Or, is UBS willing to release the names of the bankers receiving contractually-guaranteed payments?
d. Did UBS attempt to recover any of these contractually-committed amounts, or did it attempt to re-negotiate these agreements in any way? Was it successful in any case?
e. If bankers refused to renegotiate, did UBS seek to penalize them in any way, recognizing that so many lower-level employees will go substantially without any compensation for 2008 through no faults of their own?
f. Would it be fair to say that since these payments are contractual and are likely being paid to high-level employees in leadership and management positions, that those responsible for UBS' disastrous results in 2008 are receiving most, if not all, of the "bonus pool" and that lower-level employees who have come to view year-end compensation more as a deferred portion of their salary are being disproportionately and unfairly targeted?
g. Has UBS been targeted with any legal action regarding its decision on its "bonus pool"? For example, could employees assert that it's illegal to redistribute an entire bonus pool to so few employees?
Or, perhaps, could employees assert that over time with the explicit or implicit endorsement by UBS the "bonus pool" has come to be viewed by employees as "deferred salary" for past production or as "overtime pay" and not discretionary incentive compensation?
Or, perhaps, that UBS has been negligent or fraudulent in bestowing substantial cash payments to employees it so recently made redundant (see Question 5 below) while providing current employees with little/none?
Or, perhaps, that UBS seeks to encourage voluntary leavers and avoid paying lawful severance to these current employees by paying so little by way of a "bonus pool"?
2. Since the Investment Bank, and especially the Investment Bank's Fixed Income division, had such a disastrous year, could UBS please disclose the contractually-guaranteed compensation that is plans to pay to the following executives of these businesses:
a. Jerker Johansson, CEO of the Investment Bank
b. Carsten Kengeter, Co-Head of Fixed Income Division of the Investment Bank
c. Jeff Mayer, Co-Head of Fixed Income Division of the Investment Bank
3. Since the Global Wealth Management division is facing a criminal indictment and large fine in the US related to allegations of assisting clients in evading US taxes, could could UBS please disclose the contractually-guaranteed compensation that is plans to pay to the following executives of that business:
a. Martin Hoekstra, Head of US Wealth Management
b. Raoul Weil, Chairman & CEO Global Wealth Management (currently a "fugitive" from the US)
4. LAST year, UBS apparently was "avante garde" in its compensation practices, and capped the amount of CASH to be paid in a bonus to approximately USD$700k, which required the rest to be taken in UBS stock that has since plummeted by nearly 70%. (This change was reportedly made extremely late in the compensation process, just days before bonuses were awarded). This year, Goldman Sachs reportedly had a similar limit of $300k cash.
a. Is UBS paying out its contractually-guaranteed compensation according to the terms of its typical bonus plan (part cash part stock), or will it impose a cash "cap" on the amount paid according to these contracts, especially given that such a large amount of money is likely reserved for so few, and a relatively small amount of money is left over for the lower level employees?
b. If not, why not? Presumably UBS could once again this year change the terms of its plan at its sole discretion to limit the amount of cash flowing out to these individuals.
c. Is it true that those who do receive a "bonus" that is not contractually-guaranteed will have those payments deferred, subject to "clawback" based on the future financial results of UBS but paid in CASH rather than UBS SHARES that won't benefit from strong future performance by UBS? If that is so, is that also the case with those receiving contractual payments? Or do those individuals with contractually-guaranteed payments have more attractive terms and conditions from the compensation plans that were in effect at the time they SIGNED their contracts?
5. Is it true that UBS just paid substantial severance (reported to be 25% or more of the respective employee's 2006 bonus, or more) and accelerated the vesting of deferred compensation and other items for employees it made redundant in December?
a. If that's true, would it be accurate to say that the lower-performing employees who were made redundant at the end of 2008 received more compensation for 2008 than the employees who remain with UBS today? Is that sensible for employee morale and retention?
b. Could you comment on the fairness of that scheme and how that might affect retention of your higher-performing employees who remain with UBS?
c. Do you expect there to be a significant exodus of your most talented bankers following the next scheduled vesting date of past deferred compensation, reported to be approximately 1 March 2009?
6. In light of Friday's Wall Street Journal article that articulate the Investment Bank's leaders' belief that once UBS announces its results and "vision" on 10 February that its bankers will have to choose either to "defend the franchise and fight to continue" or "allow it to disintegrate and destroy itself," could you elaborate on the employee morale at the Investment Bank right now?
7. It has been widely reported that UBS has attempted to sell both its Investment Banking business and its US Wealth Management business.
a. Could you comment on your recent attempts around these businesses?
CONCLUDING THOUGHTS
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In any time of crisis there is a "right thing to do" and and then, well, there are "all other options." It is at times like these that leaders distinguish themselves as up to the task (think Jack Welch at GE, or Rudy Giuliani as mayor of New York) or they banish themselves to the dustbin of eternal management mediocrity (think Sir Conrad Black at Hollinger, or the bridge-playing Jimmy Cayne at Bear Stearns).
If UBS wants to exit the Investment Banking business and get all its employees to sack themselves--either literally or at least in spirit--they've done exactly the right thing.
If, however, UBS commits to retaining and building a "client-facing" Investment Bank (code for "no dumb/risky businesses") as it has widely hinted it will do on 10 February, it needs to revisit it's disastrous "bonus pool" decision of 2008 and "do the right thing." Here are a few:
1. Fix the fact it has taken most employees year-end compensation to $0 so it can pay a few uber-bankers their contractual millions. UBS should have as much of a "moral contract" with those employees who take orders and work hard every day as it does with the high-level "managers," the very foxes who were guarding the hen house and who got the bank into this mess in the first place. For ANY EMPLOYEE who met the goals that UBS set for them at the beginning of the year, pay them. Pay them much less than last year like the rest of Wall Street as it should be--down 30-50%--but not down 80% or 100%.
2. Admit that the culture of UBS is completely broken because it has never had one; it has attempted to mesh the cultures of entities it has acquired, including those of UBS, Swiss Bank, SG Warburg, Dillon Read, Paine Webber, O'Connor, Brinson Partners and many more. What has resulted is that UBS has historically been a bank of mercenaries enticed to work there not by a Goldman-like culture or a Morgan Stanley-like pride, but by contractual obligation.
3. In light of 1. and 2. above, UBS should ask those with contractual-payments to voluntarily take a 30-50% reduction (like the rest of Wall Street) on those contractual obligations to bring that compensation into line with reality and the rest of their colleagues' situations. UBS, however, has no right to ask them to give it all back: UBS is more to blame for this contractual mess than anyone else and it isn't fair to many of these talented uber-bankers who really do produce for the firm. If, however these uber-bankers refuse, UBS ought to sack them immediately and notify employees by firm-wide email that "X has fulfilled the terms of his/her contractual arrangements with UBS and will be leaving the firm to pursue other opportunities." This will be code for "X didn't want to do what was in the best interests of UBS, his/her fellow colleagues and shareholders, so we sacked him/her." This will do more to establish a proper culture at UBS in one day than UBS has managed to do in the past 20 years, in effect, "we're all in this together."
4. Change the rules of the compensation game PROSPECTIVELY. Yes, UBS has been "avant garde" once again in its proposals for more contingent compensation with "clawback" provisions. Bravo. This, too, is as it should be, and long overdue. However, such changes should apply as a guide for desired behaviors in the FUTURE, not as punishment for the PAST.
5. Tell the Swiss Government these are "the right things to do." If it objects, UBS' Chairman and its CEO should be leaders of principles and resign in protest.
Which will it be?
UBS FOURTH QUARTER REPORT:
UBS to report fourth quarter 2008 results on 10 February 2009The results will be presented by live webcast, starting at 9am CET. Presentation| Tuesday, 10 February 2009 |
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| Time: | 09.00 - 10.15 (CET) 08.00 - 09.15 (GMT) 03.00 - 04.15 (EST) | Webcast: | The results webcast will be available at www.ubs.com/ investorsfrom 9 am (CET)/3am (EST). | Webcast Playback: | will be available on the same day from 14.00 (CET) 13.00 (GMT) 08.00 (EST) An indexed, on-demand version of the webcast will be available from 18.00 (CET). |
Q4 documentsFourth Quarter 2008 report, interactive report, shareholders' letter, financial highlights videoclip, media release and slide presentation will be available on Tuesday, 10 February, at 07.00 CET on the UBS Investor Relations homepage at www.ubs.com/investors or UBS Media Relations homepage at www.ubs.com/media. |
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