Litigation adds to UBS worries

HSH could be the second bank to file a lawsuit over subprime losses Keystone

Switzerland's largest bank UBS is being sued by a German bank over subprime losses on a $500 million (SFr545 million) investment.

UBS suffered a SFr4.38 billion loss in 2007 as a result of write-downs to the tune of SFr20 billion. It faces a stormy shareholder meeting on Wednesday to vote on a rescue plan.

HSH Nordbank initiated legal proceedings in New York on Monday after UBS refused to discuss a settlement.

The German bank claims UBS broke contractual obligations in its handling of the investment portfolio, known as North Street 2002-04. This package was sold six years ago to the Landesbank Schleswig-Holstein, which subsequently merged with another bank to form HSH.

“Our claims against UBS will show that the manner in which the investments were sold to HSH Nordbank and UBS’s subsequent management of the assets were clearly contrary to our interests,” HSH said in a statement.

“We came to the realization that the world’s largest asset manager, UBS, appears to have condoned actions which benefited only itself, at the expense of its clients.”

The German bank would not specify exactly how much compensation it would claim, but said it would run into “several hundreds of millions of dollars”.

Should know better

UBS refused to comment on the threat. However, chief executive Marcel Rohner had said earlier this month that the bank was mindful of the threat of legal action from discontented investors.

HSH’s lawsuit is the second filed by one bank against another relating to subprime losses. Experts fear a raft of such measures in the coming months, most of them filed in the United States.

But Bank Sarasin analyst Rainer Skierka is surprised that to see lawsuits from institutional investors rather than from private individuals.

“This just one phase in all of these circumstances where people who feel they have been ill advised try to get their money bank. But in the case of HSH bank I was to some extent surprised because they are supposed to be professional investors and they should be aware of the risks,” he told swissinfo.

“We will see whether this is the tip of the iceberg or not when one of these cases is either rejected or settled by a court. That will either discourage or encourage others to follow suit.”

More pressing matter

Skierka doubted whether this latest blow would have much of an impact on UBS’s business.

“Their reputation is already so damaged that this is not really a big threat at the moment. This affects institutional business rather than private wealth management,” he added.

The UBS board faces the more pressing issue on Wednesday of persuading shareholders to accept an emergency SFr13 billion funding plan from Singapore and Middle East investors.

Many people are unhappy that the bank has been forced into going cap in hand for cash in a move that would dilute value for existing shareholders. Some have called for the head of chairman Marcel Ospel.

swissinfo, Matthew Allen with agencies

In brief

HSH Nordbank is headquartered in Hamburg, Germany. It was established in 2003 following the merger of the Hamburg Landesbank and the Landesbank Schleswig-Holstein.

The majority shareholders are the city of Hamburg, the state of Schleswig-Holstein and the Savings Bank Association of Schleswig-Holstein.

It has total assets of €205 billion (SFr330 billion) with 4,600 employees and branches in 18 locations worldwide.

UBS is Switzerland’s largest bank, employing more than 80,000 people in 50 locations across the globe.

It is the leading wealth manager in the world, looking after some SFr3.1 trillion ($2.9 trillion) in rich people’s assets.

UBS crisis

UBS endured a stormy 2007, starting with the collapse of its hedge fund Dillon Read Capital management. Two months after that, in July, chief executive Peter Wuffli abruptly departed without clear explanation.

In October of last year, UBS said it would cut 1,500 jobs in its investment banking arm, including its head Huw Jenkins. UBS chief financial officer, Clive Standish, also left at the same time.

Later that month the bank announced it was writing off SFr4.2 billion on subprime losses and SFr726 million pre-tax loss for the third quarter – the first quarterly loss in nine years.

In December UBS said another $10 billion would be written off as the US subprime crisis deepened.

A further $4 billion was written off in January, bringing the total losses to around SFr20 billion.