Friday, October 2, 1998 Published at 10:00 GMT 11:00 UKSwiss victims of hedge fund collapse
Top managers at the Swiss banking giant UBS have resigned in the wake of big losses after the collapse of the highly speculative Long Term Capital Management (LTCM) hedge fund.
The chairman of UBS, Mathis Cabiallavetta, and other top officials at Europe's biggest bank will step down after an internal audit revealed that UBS's exposure at LTCM amounted to 950m Swiss Franc.
Early on Friday morning UBS issued a statement confirming market rumours that a top management reshuffle was imminent.
Besides the chairman, UBS will lose its Chief Risk Officer, and the Co-Chief Operating Officer and Head of Rates at its subsidiary Warburg Dillon Read.
UBS's statement said that the audit had shown "shortcomings" in the bank's risk-management procedures, but ruled out gross negligence by people involved in the investment.
The bank said it would now "focus even more intensively on those areas of business likely to generate sustainable earnings with a justifiable level of risk."
Alex Krauer, vice-chairman of the bank's Board of Directors, will temporarily replace Mr Cabiallavetta.
LTCM had engaged in very risky deals in order to reap high returns for its investors. However, when the global financial crisis reached Russia, the hedge fund suddenly saw its market bets go seriously wrong.
Because of 'leveraging', which allowed LTCM to 'bet' much more money on the markets than it actually had available, the funds losses were stunningly high. Within a few months LTCM lost about half its capital base.
When the extent of losses and the complexity of the deals became known the Federal Reserve, the United States's central bank, organised a privately funded rescue package. Fourteen leading banks and investment houses from around the world got together to inject $3.5bn into LTCM to allow it trading.
It quickly became apparant that several of the banks, involved in the rescue acted out of self-interest: They had invested in or lent money to the hedge fund. UBS was one of them.
Merrill Lynch, one of the US largest investment banks, acknowledged last night that its total exposure to about 300 hedge fund groups was $2.08bn.