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Friday, 15 October 2010


I'll admit I have never been a great fan of UBS. To be a major league investment bank, you have to have smarts, but to be honest, the typical UBS banker always had the whiff of mountain goats about him. They aimed to ape their cousins on Wall Street, but somehow they seemed to end up more ape than banker. Some would say that a lot of their presence owed itself to their "advice" to wealthy individuals and businesses who wished to avail themselves of the dicrete attractions of central European banking, but whatever it was, they always seemed to be copying the behaviour of the Americans without ever leading the way.
Which is why it is hardly surprising that we should read in a 69-page “transparency report” prompted by a Swiss parliamentary committee this year, that the bank's losses were attributed to the bank’s drive for growth in investment banking, notably by originating and distributing structured products that were based on US mortgages. The bank says its risk controls had been based too heavily on statistical models, while ratings supplied by external agencies were seldom questioned.
“The incentives in place at that time to generate revenues without taking appropriate consideration of the risks underpinned this strategy and facilitated losses,” said UBS.
So as I have said before, while stochastic models might be a good measure of something, perhaps fairness of pricing, they are no measure of the overall risk in a security. The Swiss relied on their models and the model based valuations of the rating agencies. But that risk management strategy, like a Swiss cheese, is full of holes.

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