Miracle Max on UBS: Dead, or only mostly dead?

You probably saw the news on UBS today (Thursday, January 29) that bonuses will be down more than 80%, and that there will be NO cash paid to senior bankers.  This has been widely reported in the press and commented on by well-respected market sages such as Donny Deutsch and Barack Obama.

What has NOT been widely reported is that many of the senior bankers in UBS' Investment Bank believe--though may not yet be saying so openly--that this could cause the IMPLOSION of the investment bank, possibly intentionally or at least with the complicity of the Swiss.  There is growing belief among UBS employees that UBS AG (the parent of all UBS businesses) and a certain shareholder (one Swiss National Bank), may have chosen the draconian compensation cuts announced today so as to encourage UBS Investment Bank employees to leave the firm and thereby enable UBS to not only more cheaply shut down the Investment Bank, but to also focus on its two other businesses.  

[Note:  a primer on UBS that will help you understand the organizational structure:]

Simply put, UBS has 3 businesses:  

1.  Wealth Management, viewed by the Swiss as the crown jewel.  

2.  Swiss Private Bank and Business Banking.  

3.  Investment Bank.  

For further clarification, the Investment Bank (# 3 above) has 3 divisions:  

1. Corporate Finance (what they confusingly call the Investment Banking DIVISION, or IBD); 

2. Equities; 

3. Fixed Income, which is where all the s#:! has hit the fan.  

Ironically (and quietly), employees within Wealth Management and Private Bank are still being paid handsomely whilst most of the Investment Bank is getting stiffed (note the reference to "most"; more on that in a moment).  More than anything, this is because the Wealth Management and Private Bank employees have the foresight, distrust (or dumb luck) to collect their commissions and other compensation from UBS more regularly, while the dim bulbs in Investment Banking are required to trust in the integrity of UBS by waiting until months AFTER they've produced to collect the fruits of their labor (reminds you of naive American investors trusting certain Latin American countries to repay their sovereign debt, and we know how that turned out).   What the announcement today about UBS' Investment Bank means is that its employees in the Corporate Finance (IBD) and Equities divisions are being forced to pay for the sins of the Fixed Income Group, and that all Investment Bank employees in aggregate are being thrown under the bus so as to protect the "Swiss identity" associated with Wealth Management and Private Banking businesses.  

There could very well be a MUTINY within UBS, and if the stock market sensed it today, the Financial Press missed it completely.  If you look, UBS stock was down over 13% today (Jan 29) following the announcement, versus about 5-8% for other banks like Citi,Morgan Stanley, Goldman Sachs, Credit Suisse, JPMorgan, etc.   There is a reason for that.  

Here are some reasons why, as well as some general observations.

1.  The Stock Market recognized that incentives to work at UBS' Investment Bank have been effectively eliminated, and the most likely casualties and/or departures will be the most talented of bankers.  If you read the press reports (ignore all the annoying reference to CHF or Swiss Francs), UBS announced that there will be about USD$1.7 billion in bonuses paid out for 2008, down from about $8.0+ billion in 2007.  [To put this decline in perspective, it is a much, much more severe cut than any other Wall Street bank, where 2008 compensation was down perhaps half that much. More on the competition later.]  The previous reference to "most" bankers getting stiffed was because if you then read the fine print of the press releases, it states that approximately $1.1 billion is GUARANTEED BY CONTRACT to certain (ie, a "very small number of") senior bankers at UBS, many who likely reside within the Investment Bank.  So when UBS and the press say "bonuses are down over 80%" and there will be "no cash compensation," it may be semantically correct, but it's extremely misleading. What they don't want to call attention to is the FACT that these senior bankers have enforceable employment contracts against UBS, and the reality is that many of them will enforce their contracts and force UBS to pay those contractual amounts (or sue the giant), in many cases $4 million, $6 million, $10 million or more annually (for however long the period covered by the contract) given the high level of the bankers commanding those contracts.  In the case of the Investment Bank's CEO (Jerker Johansson) who was hired by UBS AG CEO, Marcel Rohner, and the esteemed Board just last year, it is reported that his contract was for more than $25 million a year.  Strangely, he has all but disappeared from sight according to many within the Investment Bank.  More on him later.

If the Swiss ask these bankers with contracts to give some compensation back, these senior bankers with contracts have ZERO incentive to do it, so they won't likely say "yes" out of the goodness of their hearts.  They are not dumb, rest assured.  If they say "no," UBS could presumably fire them, resulting in the most senior, talented bankers of the firm departing with their satchels of cash and leaving the Titanic with nice deck chairs and a helluva band, but with few experienced officers to steer the ship;  alternatively, these senior bankers could call that bluff and say "no," and if UBS then doesn't fire them, the other bankers at the firm (the 95% who don't have guaranteed compensation) will resent them at best, crucify them at worst (so much for that "clubby culture" that the army of administrative losers in UBS' H.R. department brags about).  In any event, the fact is that this uncertainty ground business within UBS' Investment Bank to an absolute HALT today.  Many bankers reportedly just left the office (one revered soul we'll tell you about left to a standing ovation).  In any event, NO client business is being done now by UBS' investment bankers given all the uncertainty around whether, how or when they will be paid in the future.

But first, a little Wall Street/business lesson.  The only reason a senior banker (or any sane, profit-seeking person) with a contract would be willing to re-negotiate such a contract is if (a) they ultimately get better terms, such as by deferring some money or restructuring the agreement to collect it over a longer term as a "selfless" and heroic concession to the firm (this is when senior management begin phoning each other and using words/phrases like "responsibility," "leadership," and "right thing to do") or (b) they don't want to risk getting fired to collect on a one- or two-year contract if they believe they have 5, 10 or 15 great income-producing years left in their career that will pay them much more over the long haul.  The problem today, however, is that nobody believes the "good old days" of Wall Street are coming back so long as Uncle Sam (and not Fidelity) is Goldman Sachs' largest shareholder, and Treasury Secretary Tim Geithner is the de facto CEO of every Wall Street firm.  So in all likelihood, these investment bankers with contracts say "no gracias" to UBS.  They will take the money and run because NONE of the senior bankers has any trust left in UBS nor any hope they can be paid fairly for the income they produce for their employer given today's political climate (c'mon, it wasn't Barney Franks fault!).  President Obama, the Congress and the Talking Heads are trying to convince Americans that investment bankers deserve a place in the social pecking order somewhere south of that Duncan guy from Arthur Andersen who signed off on the Enron audits, and perhaps just north of former Senator John Edwards (but it's close).  Seriously though, if UBS can tell its Corporate Finance employees on January 29, 2009(!) they're being paid $0 for 2008 despite the millions they produced in good faith for UBS during 2008, there is nothing to stop UBS from doing it again in a year's time in exchange for the hard work these bankers are now being asked to undertake for at least the next 365 days (despite all the euphoria over imminently improved highways, ubiquitous broadband, free coupons for digital set-top converters and a cornucopia of contraception, most on Wall Street don't think 2009 will be more fun than 2008)!  Nobody with a brain and a book of client relationships would ever take that chance.  

Ironically, many of these bankers now believe their best option is to get fired by UBS, take the money (currently owed and currently escrowed by UBS for PAST YEARS), and start over somewhere else.  And, contrary to "main street" beliefs and the guys in the cheap seats at leading financial news networks (you know who they are), these people WILL have many job offers or they will start their own firms and be very successful.  When people laugh and ask rhetorically "where will they go?" make no mistake about it;  these people have enough money to do absolutely nothing if they so choose, and more than enough brains to do just about anything if they still want to work.  Why don't these talented people just quit UBS now?  Again, because they're not stupid.  UBS has control over their (more sizable) compensation from PAST years that they would forfeit if they simply chose to walk out the door voluntarily tomorrow; better to collect their (relatively insignificant) base salary and benefits until UBS fires them, at which time all their past compensation that was deferred immediately vests.  A perfect system to encourage productive people to sit around and do nothing (are you taking notes, President Obama?!)

Finally, the way UBS is presenting this is that there is NO compensation being paid for 2008, and the "bonus pool" they allude to is a "retention" mechanism (for the future!) to get people to stick around and see the firm through this debacle.  The problem is that (a) this "retention pool" is chump change relative to the net worth of the bankers it's targeted at and therefore the only people who will stay to collect it are the underperformers who have no other alternatives; (b) nobody trusts UBS to ever pay it; after all, as UBS has reneged on 2008, it will most certainly renege in the future; and (c) nobody is going to ascribe value to it if it's contingent and outside of their control (wait, after all this, you're seriously asking the Corporate Finance bankers to trust their LIVELIHOODS in their Fixed Income colleagues?!).

2.  ONLY UBS--for whatever reason--chose to completely stiff its honest employees and the Stock Market fears the fallout.  So, why would the Swiss bite off their own noses to spite their faces and giving big goose eggs to so many?   Here is why:

The "bailout" announced earlier in the year by the Swiss National Bank and UBS is apparently causing great political and perhaps even social unrest in Switzerland.  It has been reported that the homes of former UBS executives have been stalked and picketed, and individuals have been the targets of violence.  It is widely discussed within UBS that in Switzerland, current chairman (Peter Kurer) and CEO (Marcel Rohner) travel with bodyguards, their homes are protected by guards, and their children receive police escorts to school.  In short, there was NO political support by the Swiss Government for paying any bonuses (even though it could destroy the entire firm and saddle the Swiss Government with an even worse situation:  bad assets, and no talent to carry on at UBS) and management was looking to throw someone under the bus.  [Note:  President Obama preached a very similar sermon today about "shameful" Wall Street, right before financial stocks took their final nosedive for the day].  

What UBS and Swiss regulators don't realize is if they DON'T fairly compensate the 95% of employees who are honest, hard-working people and who only get paid once a year, the value of the franchise will erode by the day--or perhaps in a day, if you witnessed UBS' stock price today--as the most talented people leave and the rest of the employee base responds to the new incentive scheme by becoming catatonic.  Litigation is inevitable, as understandably enraged employees (as well as one UBS Vice Chairman today, reportedly) cite the "implicit contract" between investment banks and their employees that has evolved over many years on Wall Street and created an environment where employees--rightly or wrongly--have come to view year-end compensation as nothing more than deferred wages (the only thing juries like less than affluent bankers are the more affluent, belligerent banks that attempt to cheat them).  In any event, UBS publicly identified its scapegoats today:  the employees of the Investment Bank.  [Note:  While the "toxic assets" at UBS that you read about in the press are in the Fixed Income division within the Investment Bank, the Wealth Management business is hardly without its sins:  that group is facing a criminal indictment in the US as a result of tax evasion chargesbecause it had offshore accounts for US citizens that enabled them to escape US tax.  This has caused a serious diplomatic crisis between the US and Switzerland, with the US Government seeking a fine for UBS rumored to be USD$2bn or more.  Also, the US has given Switzerland a definitive timeline for turning over sensitive documents.  The Swiss have yet to reply. This could have something to do with the Feb 10th date mentioned below).

So, there is a growing belief that the Swiss/UBS, unable to sell the Investment Bank (nobody wants an investment bank now!) or spin it off (could it stand on its own?), are resigned cutting off the gangrenous limb (the Investment Bank) rather than have the infection kill the entire patient (Wealth Management and Private Bank).  What's the cheapest way to do that?  Tell all your employees that they've been working the past 13 months for free and pray they all quit so UBS avoids the severance costs.  At a minimum, maybe now some of those picketers will get the hell off Marcel's front lawn.

3..  Leaders internally at UBS actually seem to be PREDICTING the inevitable implosion.  As if on cue, the well-regarded Joint Heads of Investment Banking (Rick Leaman from the US and Alex Wilmot-Sitwell from the UK) apparently felt compelled to hold a conference call with all the Managing Directors of the Investment Bank this morning.  

On the call:

* the Joint Heads noted that "big news" and painstaking detail is widely anticipated when UBS reports on Feb 10, about the same time the final figures and details of the bonus plan are released to employees;

* they discussed that the Investment Bank employees will then have to decide whether to "defend" the UBS Investment Bank franchise, or basically watch it disintegrate;

* very oddly, the CEO (Jerker Johansson, mentioned previously) of the Investment Bank apparently did NOT participate on the call (this is a startling lack of leadership that should be widely reported and which might indicate (a) he's taking his money and running, less than 1 year after arriving; (b) he's been fired; or (c) both).

Shortly thereafter, a rumor began circulating among the Managing Directors that not only has CEO Jerker Johannson been fired, but that the two bankers leading the call have also already been FIRED and are simply seeing a sad situation through to the Feb 10 announcement.  If it's true that they've been fired, most Managing Directors would attribute their fate to a deal that went bad for UBS last year called Lyondell-Basell.  This was a big merger and apparently these three (the two Joint Heads as well as the Investment Bank's CEO) are being blamed by Switzerland for asking UBS to provide over a billion dollars of loans to support the deal, loans which have gone bust under a year later and on which UBS may not recover much.  Unfortunately, this blowup was AFTER all the crap related to subprime mortgages, Alt-A, monoline exposure, leveraged loans, etc. that forced the Swiss Government to come to UBS' rescue with its "bad bank" joint venture (sorry Team Obama/Geithner; the Swiss scooped you and Paulson's initial plan was right after all...double ouch).  Yes, AFTER!  Alas, heads must roll, even though just about every bank on Wall Street got burned on this deal and these loans are probably not too far off from the kinds of loans that Congress is pushing US citizens--er, the TARP--to make.

4.  The hypocrisy of it all will be too much for good employees to bear.  It is quite a spectacle to see UBS pleading poverty and trying to claim the moral high ground by claiming it is paying no bonuses.  The Investment Bank's employees know that this assertion is a complete joke.  UBS is paying bonuses--big bonuses; just not at the Investment Bank.  In essence, UBS is simply taking money from one pocket (by withholding from the Investment Bank) to pay and protect the two businesses they now prefer and wish to protect (Wealth Management and Private Banking) and with which their national identity is based.   The mutiny won't be confined to within the Investment Bank, but will spread to--or at least be aimed at--these "chosen" businesses. 

Somebody in the press should ask UBS the following question:  "If you have the threat of a criminal indictment from the US Government hanging over your Wealth Management division right now because of all the offshore accounts US citizens were holding at UBS (whilst the current CEO of UBS AG ran the business), how is UBS in a position to be aggressively hiring (in most cases with multi-million dollar guaranteed signing bonuses PAID UP FRONT no less!) Wealth Management teams in the US and around the world from other troubled brokerage firms like Citigroup, Morgan Stanley and Merrill Lynch?!  How can UBS say out of one side of its mouth it is paying no bonuses, whilst it pays millions to poach Wealth Management talent?"  The answer:  they're trying to reverse the outflow of Assets Under Management that have plagued it and protect what has become--overnight--its "core" businesses.

****

Admittedly, there are many assertions here (albeit based on first hand accounts), but much of it might be verified by asking UBS some tough questions and seeing how it reacts, or by checking with senior bankers at the firm or other sources you media types no doubt have access to.  One explanation for UBS trying to keep a lid on things is because it is (a) trying to sell the Investment Bank one last time; or (b) trying to buy time before the story hits the fan on Feb 10.

One last point that is at least enjoyable for your viewers/readers to know:  the reality is that nobody is in charge right now.  As evidence of how screwed up things are, look at this report.  It tells the story of Jon Bass, one Managing Director in UBS' Fixed Income Group, who reportedly after a conference call with the Investment Bank's CEO, reportedly told him to "Sod Off" and walked off the floor to a standing ovation.  His poor wife may have been displeased a cooler head did not prevail today, but she can sleep soundly knowing her good man won't be buying his own beers around Stamford anytime soon.  The link to the Reuters news article follows.

http://www.reuters.com/article/marketsNews/idINN2926323420090129?rpc=44

Another easily verified belief is that pandemonium has broken out.  Periodically throughout the day Thursday on the trading floor in Stamford (where thousands are employed), traders were anonymously seizing the "squawk box" (which is basically a microphone / Public Address system on the trading floor) and playing a clip from the movie "Old School" where a drunken Will Ferrell screams, "Let's all get out of here and go streaking!"  Sophomorish?  Perhaps.  A sad sign of how desperate, helpless and completely betrayed the employees feel?  Absolutely.  Sometimes laughter is the ONLY medicine.  Right Reuvan?

Most of America earns a livelihood and collect it ratably over 52 bi-weekly pay periods.  For whatever reason, Wall Street has always had a model where (approximately) one-tenth of the earned wages were paid ratably over 52 weeks, and the remaining nine-tenths was paid in a lump sum in February of the following year.  If nothing else, it provided Wall Street banks with an interest-free loan from their own employees of many billions of dollars (who said the business model was no good?!).  Had employees at UBS known the firm was going to change this model unilaterally at half past midnight, AFTER all the other investment banks paid their people according to Wall Street's "implicit contract" (to paraphrase the UBS Vice Chairman) and nearly two months AFTER the end of its fiscal year, you can bet the employees would have asked for it ratably over 52 weeks, thank you very much.

Again, for political effect (and not coincidentally while the self-important talk at each other in Davos this week), UBS will continue to tell anyone who will listen that it's not paying its people bonuses.  Don't believe it for a second, and don't permit that lie to be repeated by you our your colleagues in the media.  The reality is that it's paying its Wealth Management and Private Bank employees as it has all along (regularly, formulaically, and at 100 cents on the dollar), and it's paying the lucky few very senior bankers in the Investment Bank who apparently have $1.1 billion in enforceable contracts (big names, like Jerker Johansson; Rick Leaman; Kevin Cox; Simon Warshaw; Cary Kochman; Jeff Sine; and the list should go on, and on, and on...).  Those who were basically told today they should expect little or no pay are generally very honest, hard-working employees in the Corporate Finance, Equities  and yes, even the Fixed Income, division who had NOTHING to do with the "toxic assets" in Fixed Income or the criminal "tax evasion" charges facing Wealth Management.  These 95% of employees went to work last year each and every day just like any other year, did their jobs with pride and persistence, worked extremely long hours in Wall Street's culture of "trust" and were generally successful during very difficult times.  Unlike a doctor, attorney, or the guy at Home Depot, they were just told they did it for free.  Don't let those big numbers you read about fool you;  guys like Bob Rubin and and Lloyd Blankfein can skew those numbers incredibly. 

 

On Wall Street, these 95% of good people we're talking about have come to expect some reasonable level of compensation at the end of the year to pay their basic living expenses. They are in every case typical tax-paying citizens (sorry Secretary Geithner AND Congressmen Rangel...go ahead, Google it) and in many cases just midlevel professionals with student loans and young children who are being unfairly punished for the mistakes of others.  Whose mistakes?  Who should have noticed the utter EXPLOSION of UBS' balance sheet that financed the leveraged purchase of all these toxic assets that have nearly brought UBS and every other bank (and the world economy, for that matter) down?  Hellllloooooo?!!  Possibly the board and senior management of UBS AG, including CURRENT CHAIRMAN Peter Kurer?!!  After all, did they think to actually READ the financial statements?  Did they somehow MISS the balance sheet?!  Who should have known that US citizens may have been hiding assets illegally overseas?  Probably the head of the Wealth Management division, Raoul Weil (currently a fugitive from the US), or perhaps his predecessor in that role, CURRENT CEO OF UBS AG Marcel Rohner?!!  It certainly was not the fault of the rank and file employees of the Investment Bank who got the shaft today! 

The bottom line is this.   Goldman Sachs paid its people, albeit much less than 2007 and rightfully so.  Morgan Stanley, same thing.  JPMorgan, same thing.  Deutsche Bank, same thing.  Even Merrill Lynch, as Ken Lewis has apparently and belatedly discovered (say again, it was JOHN THAIN who was clueless?!!!), paid what it had accrued and rightfully owed to its employees.  Hell, UBS' Investment Bank just fired the bottom 10-15% of all its people and even those "unfortunate" souls got 25% of last year's bonus, received it in CASH, and became VESTED in all their other deferred compensation from past years!  Yes, you read that right:  it was better to get fired two weeks ago than wake up at UBS today!!!  You couldn't make this stuff up if you tried.

In the US, if any of the regulatory brain trust, our delusional Speaker or her animated counterpart in the Senate, or our brand new "yes, we can" President wants to bring criminal charges against Stan O'Neal and John Thain (Merrill Lynch) or Marcel Ospel and John Costas and Raoul Weil and Marcel Rohner (UBS), or Sandy Weil and Chuck Prince (Citi) and attempt to recoup some of the HUNDREDS of millions of dollars they were paid, they should have at it in a court of law under the watchful eye of all.  Was there fraud?  Who knows.  Did some have inside information and get out early with all their cash because they alone knew how bad things would get?  Maybe.  Is stupidity is a crime?  Quite possibly.  Just ask one Elliot Spitzer, who brought us so much of this constructive Wall Street condemnation (how are those charges against Hank Greenberg and Dick Grasso coming along, G'uvna?)  In the absence of such legal charges, however, it is only fair and equitable that the good everyday employees of UBS (or any other organization for that matter) should be reasonably compensated and paid timely for their services that have ALREADY been provided in good faith to their respective employers.  

UBS stresses that the "plan is not final" and perhaps it will still amend it in time to simultaneously "do the right thing" for its loyal employees, preserve the value of its formidable investment banking franchise, and recapture its reputation for stability and honest business dealings in its Wealth Management business.  UBS should most certainly publicly acknowledge that the we are all facing unprecedented and difficult times and be sensitive to the perception that any level of compensation--no matter how well deserved and rightfully paid--will be scrutinized and potentially criticized in today's environment.  UBS should apologize no more for its compensation of its employees than Chevron, Shell and British Petroleum were willing to apologize for their record profits last year allegedly, as I recall, by exploiting (or was it "extorting"?) helpless global consumers (how did that brilliant idea of a Windfall Profits taxdisappear so quickly?!  Make no mistake brain trust:  the only thing disappears faster than $160 oil is talented human capital with endless opportunities available to them.)  Unfortunately, it seems like there is a vacuum of leadership today among Wall Street CEOs where so much of the crisis is centered (and no one like J.P. Morgan--the man--available to step in to lead) and government leaders around the world.   Leaders must make principled stands and UBS' leadership, if it in fact has any, could be doing a lot more to articulate what it does as a firm, highlight the many incredible contributions its employees make on a daily basis and convince people that it can be a constructive and trusted leader in getting capital markets and the global economy back on track.

©  Leo Grace, 2008.  All Rights Reserved.

Please share your comments, observations or a letter to Kurer/Rohner/Johansson for all the world to see, and check back for our updates on what's up at UBS at www.whatupatubs.blogspot.com