Bonuses Likely To Be Cut After $2.3 Billion Trading Loss At UBS

A UBS (NYSE: UBS) equity derivatives trader was charged last week with fraud and false accounting after disguising losses of $2.3 billion at the Swiss bank. Reports indicate that London based Kweku Adoboli, 31, racked up the staggering losses through a series of trades in S&P 500, DAX and EuroStoxx futures, while circumnavigating risk limits by creating fictitious hedges.

The initial scope of the financial damage was raised by UBS from an original estimate of $2 billion. It was initially speculated that Adoboli may have made the losses trading the Swiss franc which moved violently lower overnight earlier this month after dramatic intervention from the Swiss National Bank.

It is now apparent, however, that Adoboli was betting on European and U.S. stock prices using leverage in the futures markets. According to UBS, the unauthorized trading occurred over the last three months, a period which has been characterized by extreme volatility in European and U.S. stock markets, but the charges that have been lodged against Adoboli go back to 2008.

The trader, who was educated in Great Britain and is of Ghanaian descent, appeared to have lived a rather charmed life prior to his downfall. He rented a $1,600 a month loft in a tony part of London, near the city's financial center where he worked. His father is a former United Nations official according to reports.

Sources told the Daily Mail that Adoboli earned around 200,000 euros a year with bonuses adding up to another 400,000 euros to his annual compensation. Everything came crashing down last week, when Adoboli allegedly exposed his unauthorized trading to his superiors at the bank and was subsequently arrested.

The young trader's losses are expected to take a large toll on UBS, which has already seen billions of dollars shaved off of its market cap as a result of the news. Several reports on Monday indicate that it is now expected that the bank will slash bonuses for its entire investment banking unit - a move which will undoubtedly disgruntle many employees.

Steven Hall, managing director of Steven Hall & Partners, told Bloomberg, “A problem of this magnitude means they may be very strongly challenged to have any bonus pool at all." He added, “It's pretty clear there are going to be a lot of people who are not going to get bonuses.”

Prior to news of Adoboli's epic losses, UBS had announced that it was planning on cutting around 3,500 jobs in an effort to save money. Not only are bonuses likely on the chopping block in the wake of the rogue trading losses, but more jobs as well.

According to Jason Kennedy, who is the chief executive of a London-based search firm, the bank may have to cut 10% to 13% more of its workforce than it initially planned. In sum, Adoboli's actions are likely to cost UBS much more than the $2.3 billion he lost on market bets.

His boss has already quit, and top talent may also be walking out the door as the bank reports more losses and is unable to pay competitive bonuses. Some clients will undoubtedly be leaving as well, given the serious questions that now surround the bank's risk management practices in the wake of this incident.

The news of the rogue trading losses could not have come at worst time for UBS, as the bank, and its stock price, were already struggling mightily in the wake of the European sovereign debt crisis. After this latest shock, UBS shares are now down around 36% in the last year.