Moody's Puts UBS On Downgrade Review Due To "Weakness In Risk Controls"
Market sentiment is now instantaneously lurching from one opposite to another with each consecutive headline, infused with the grace of a drunk and high Berlusconi in an American Apparel store: the schizopanic is becoming unbearable for anyone who still has their own money in the market. Futures are closed for 10 more minutes, but since the logical response to this news would be a major drop, we propose that a huge spike in futures will follow on implied certainty that Europe will be forced to pull an "America" and dump several trillion euro in taxpayer funds to recapitalize its banks. And following in America's footsteps, look for the start of Mutual Assured Destruction rhetoric out of Eurocrats as soon as this evening.
Moody's places UBS AG's ratings on review for possible downgrade
London, 15 September 2011 -- Moody's Investors Service has today placed the C/A3 standalone financial strength rating and Aa3 long-term debt and deposit ratings of UBS AG on review for possible downgrade. The short-term Prime-1 ratings of UBS AG has been affirmed. As part of the action UBS Deutschland's long-term rating of A2 as well as its Prime-1 rating was also put on review for possible downgrade.
The primary focus of Moody's review will centre on ongoing weaknesses in the Group's risk management and controls that have become evident again by the events leading to UBS announcing a loss due to unauthorised trading by a trader in its Investment Bank. While the situation is still being investigated UBS currently expects losses in the range of US$2 billion.
Moody's believes that a loss of that magnitude would be manageable for the Group given its sound liquidity and capital position. However the losses call into question the Group's ability to successfully complete the rebuilding of its Investment banking operations. Therefore, the review will also consider the implications such an event could have for management's ability to continue to grow IB revenues in an appropriately risk contained way and the potential impact on profitability of a further setback on this front. In a similar vein, we will also consider the potential implication such an event could have for the reputation of UBS with regards to its Private Banking Clients as well as its Wealth Management Business.
Moody's acknowledges the progress UBS has made in improving its risk management functions since the crisis revealed considerable shortcomings in this area. However, we have continued to express concerns with regards to the ability of management to develop a robust risk culture and effective control framework while at the same time trying to re-establish its position in certain market segments. The events of today suggest that this remains a key downside risk for the Group.
More generally, such losses are also a reminder of the complexity and opacity that is inherent in capital markets businesses. Moody's has commented on various occasions regarding the risks to which such complexity and opacity give rise. We continue to review how best to reflect those risks in bank ratings.
Moody's notes that the review is unlikely to lead to downgrades of more than one notch.