September 15th, 2011
08:12 PM GMT
(CNN) - UBS stands for the Union Bank of Switzerland. Yet this week's discovery of a $2 billion loss by an alleged rogue trader gave this most conservative of financial institutions the dubious honor of being dubbed the ‘Unauthorized’ Bank of Switzerland across many a dealing room in London.
The trader allegedly responsible has been identified. Police have made an arrest and the bank’s head of risk management will likely be engaged in some serious conversations. All the while, banking sector analysts are furiously adjusting their next earnings forecasts for the company.
In a memo to staff, UBS Chief Executive Oswald Grueber reportedly told staff that management would get to the bottom of the matter as soon as possible.
However, people familiar with the matter tell me Thursday's event may lead to some profound changes for the 157-year-old finance house.
Switzerland's largest bank has long been a beast with two heads: an investment bank, which booked billions of losses during the credit crunch, and a solid wealth management division, making billions from managing mega-rich money.
A former board member of UBS says its top brass have often debated the merits of keeping the two units combined.
"They believe the investment bank has all the value because of the research it produces and products and services it offers but if you look at other private banks without such divisions versus pure investment banks, the wealth managers are more highly valued.
"I think we all agree the glory days of investment banking are gone," said the source, who wished to remain anonymous.
UBS has spent the past two years trying to revive its fortunes, increasing risk-taking to boost earnings on trades.
After taking eye-watering hits during the credit crunch, the company had to raise $46 billion (including a hefty injection from the Swiss government) to shore up its capital.
Thursday's news won't help. Worse, it comes at a time when lawmakers in Switzerland and elsewhere in Europe are considering splitting risky banking operations from retail services.
"UBS isn't likely to collapse," says Lex van Dam, who helps run a $700 million hedge fund and family office. But there is a "much higher chance that this bank will now be broken up to reduce clients' exposure to investment banking losses."
These days, "the banks are too large," van Dam said.
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