A Deeper Look At The Dire Bonus Situation At UBS


[credit provider=”AP”]

About a month and a half ago, the buzz was that, “the UBS investment bank is f$%^ed.“The firm has been facing challenges due to the regulations expected to be imposed by their homeland country, Switzerland.

Now a rogue trader has cost the firm $2 billion

A UBSer says the effects of that $2 billion loss will hit bonuses.

They say, “A bunch of employees that were staying put anticipating a bonus just got sacked in the nuts.” 

That suggests that people will leave for other job opportunities before bonuses are paid out in March. Talent loss would further devastate the struggling bank.

The numbers show that it’s likely many bankers will get an extremely low or zero bonus. 

The investment bank’s profits in 2011 so far are $1.37 billion, according to the FT. Rogue trader Abodoli’s $2 billion loss means that the investment bank might be $630 million in the red. 

If the firm fails to make up for the loss, it’s likely to be banker bonuses that take the hit. Employees in the investment bank typically have their bonuses tied to the overall profitability of the unit, rather than their individual performance. And because a lot of the bonus’ value is now in stock, which is tied to long-term profits of the unit, bankers might see those pay-outs, which they expected to get in the future, dwindle, especially if the investment bank is downsized. (An investment bank downsize at UBS has been on the table for months, we hear, but now it’s looking more likely.)

Worse – the loss might be big enough to trigger clawback clauses, which would “claw back” bonuses that bankers earned in the past to make up for the losses. (We’ll look into that more today. For more on clawbacks – click here.)

The good news is that salaries are higher after regulations required bonuses to be a less significant portion of bankers’ pay. So far this year, UBS has set aside SFr3.4bn ($3.9bn) for staff salaries and bonuses within its investment bank, according to the FT

Of course higher salaries have their downside too: layoffs. Bonuses enable banks to pay employees well when it does well and vice versa. Higher salaries are more expensive, long term pay-outs. A huge round of 5,000 layoffs were announced in July. The bank officially started sacking people a couple of weeks ago. More are expected. 

A management change might help morale and prospects for the future. 

“There has to be a change in senior management,” says our source. UBS CEO Oswald Gruebel is expected to make an announcement about the investment bank on November 17.

The trader’s boss already resigned over the news. The next guy to look to might be Carsten Kengeter, the firm’s head of the investment bank.