2008 2ND Quarter Results Amount to Huge Disappointment for Investment Bank UBS

Wary of mounting losses at the Swiss-based bank, clients apparently are walking away in droves. Total outflows in UBS’ wealth management units totaled nearly $40 billion in the second quarter - more than triple the amount in the first quarter - and contributed to second-quarter losses of $331 million for UBS. It is UBS’ fourth consecutive quarterly loss and negates a prediction of only a month ago when UBS said it expected to break-even in the second quarter.

Following the second-quarter losses and another set of write-downs totaling $5.1 billion, UBS says it is now planning to separate its investment banking and wealth management divisions into three autonomous units: wealth management, investment banking and asset management. In addition to the restructuring plans, UBS also announced the replacement of Chief Financial Officer Marco Suter with John Cryan, a British banker.

UBS’ disappointing second-quarter results follow a string of problems plaguing the beleaguered company. As one of the hardest hit by the subprime crisis, UBS has taken more than $43 billion in write-downs from exposure to risky mortgage assets so far this year. (Collectively, financial institutions worldwide report nearly $500 billion of write-downs related to the collapse of the U.S. subprime market.)

Included in UBS’ second-quarter results is a provision of $900 million for its Aug. 8 settlement with state and federal regulators over sales of auction rate securities. In agreeing to the settlement, UBS will buy back nearly $19 billion of the illiquid securities from retail clients. It also will pay a fine of $150 million.

The settlement with UBS is the largest to date in a broader investigation into the auction rate securities market and claims by investors that Wall Street investment banks and securities firms failed to provide adequate information about the inherent risks of the instruments. UBS also faces scrutiny from investigators who say the bank helped wealthy Americans evade U.S. taxes on offshore accounts. A congressional undeclared subcommittee looking into the matter stated that UBS had an estimated 19,000 accounts for U.S. citizens hiding $18 billion in assets from the Internal Revenue Service (IRS).

These and other issues hammered UBS’ stock prices this year, causing it to fall by almost two thirds since the beginning of 2008. Meanwhile, the damage to UBS’ reputation lingers on. And while its decision to depart from a one-bank strategy into three autonomous business units is a welcome sign for investors - and signals a nod to greater accountability and transparency - the fact remains: Reputation, once lost, can be very hard to reclaim.