UBS has endured a catastrophic three years. Now, under the stewardship of former Credit Suisse chief Oswald Grübel, the bank is attempting to restore its reputation and revive its business. Geraldine Lambe reports.

The fall from grace of UBS has been one of the most dramatic stories ever seen in global banking. Of all the banks to have survived the financial crisis, UBS has been hurt the most and its previously stellar reputation is in tatters. Once the crowning glory of Swiss banking, UBS's fall has shaken the foundations of the country's centuries-old private banking model, set the Swiss government at loggerheads with other governments and its own courts, and caused uproar within this most conservative of societies.

Since it first announced the closure of an in-house hedge fund in May 2007, UBS's troubles multiplied to such an extent that it emerged as the poster-boy for everything that clients, investors, regulators, governments and counterparties did not want a financial institution to be. Its subprime losses - eventually totalling a staggering $50bn - revealed that an army of risk managers had been looking the wrong way, allowed to do so by a dysfunctional management structure which meant that neither senior managers nor the board saw the danger until too late.

The bank was forced to issue an extraordinary mea culpa to the Swiss Federal Banking Commission in April 2008, outlining in shameful detail the shortcomings of the bank's management, funding and risk practices. Years of spectacular growth and profitability suddenly looked more like luck than judgement. Worse was yet to come. With the investment bank in free-fall, the winds of chaos blew on the jewel in the Swiss bank's crown and the envy of every other bank: UBS's massive wealth management business.

First it was hit by a scandal about offloading risky auction rate securities on wealthy clients; then it was engulfed by a US government probe into tax avoidance, involving the use of sham entities and secret accounts by clients to avoid paying hundreds of millions of dollars in tax. Bankers and clients were indicted. As the US government widened its net, it struck at the very heart of Swiss private banking by demanding that UBS reveal the account details of up to 52,000 US clients.

The unfolding drama has led to bewildering change in the management team. Since the financial crisis first began, the bank has had three chairmen and five CEOs. The board of directors, long criticised for being weak and lacking financial expertise under the reign of former chairman Marcel Ospel, has been restocked with high-ranking and experienced financial experts.

It comes as a surprise, then, that UBS is still in business, let alone has a franchise worth saving. But it is and it does. Miraculously, the bank has hung onto many of its best corporate clients and has emerged as one of the three 'go-to' banks for governments seeking advice about their stakes in financial institutions. Its equity business worked on many of the seminal deals of 2009. Despite all the turbulence, it has maintained a dominant presence in Asia, taking the top slot in the revenue league tables in the region for 2009. A fixed income rebuild led by a Goldman Sachs fixed income, currencies and commodities (FICC) veteran is under way. It turned in a net profit for the final quarter of last year.

The turnaround is attributed to Oswald Grübel, the long-time Credit Suisse chief who came out of retirement to take over as CEO early last year. Rumour has it that the Swiss government made him an offer he could not refuse. No stranger to tough decisions - he was one of the chief architects of Credit Suisse's own revival - Mr Grübel has cut costs and cut people. He met targets a year early, and has steadied the organisation. Does he now have the management, structures and business model in place to bring UBS back to life?

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Oswald Grübel: the former Credit Suisse chief has been tempted out of retirement and is responsible for steadying UBS's ship

Seeds of UBS's downfall

The foundations for UBS's downfall were laid, not during the credit bubble when it was piling into the subprime market, but at the end of the 1990s, when UBS was caught out, first by failed trades in Japanese warrants, on which the bank lost an estimated CHF1bn ($929m) in 1997 (although some insiders suggest it could have been as much as CHF3bn), then by the collapse of hedge fund Long-Term Capital Management (LTCM), in which the bank was by far the biggest loser, writing off almost $1bn.

Now, these losses look paltry; then they seemed enormous, and many believe that it was these events which forced the reverse takeover by Swiss Bank Corporation (SBC), a much smaller firm, in 1998. In any event, it was SBC executives - led by Mr Ospel - who took control of the new firm, ousting Mathis Cabiallavetta, the former CEO of the old UBS, along with UBS chief operating officer Werner Bonaduer and chief risk officer Felix Fischer.

The events ushered in a conservative risk management culture, pushing the firm towards lower-risk, high-volume trading businesses in which the bank became a world class player, executing at its height 12% of total currency trades and one in nine equity trades worldwide. In the heady years following the creation of the new UBS, the bank could seem to do no wrong. Aside from a blip after the dot-com bust in 2002 and 2003, the group's net profits continued to climb, virtually doubling in 2005 to a record-breaking CHF13.5bn. It became the world's biggest wealth manager. It was flying high.

However, the bank's conservative risk culture fostered a blinkered view of risk. While UBS introduced tough new procedures for vetting the bank's exposure, risk managers were almost wholly focused on credit risk, and using simplistic measures that did not take account of correlation and liquidity risk. This myopic view was about to be tested.

At the end of 2004, one of UBS's top credit traders, Michael Hutchins, pitched the idea to then investment bank CEO, John Costas, of creating a hedge fund unit focused on the booming credit markets. One of Mr Hutchins' trading strategies - buying AAA rated bonds, which UBS risk models assumed would never receive less than 98% of their face value, and hedging against the risk of them losing 2% - would enable UBS to take aggressive positions without breaching the strict risk controls set by Zurich.

As the bank was at the same time looking for ways to harness the growth of alternative assets, the idea for an internal hedge fund took hold. In early 2005, to the surprise of group chief executive Peter Wuffli, Mr Costas suddenly announced that he wanted to run the venture himself. To prevent the exodus of both CEO and the bank's best fixed income traders, the bank agreed. Dillon Read Capital Management (DRCM) was born.

UBS's demise: key players

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Marcel Rohner, former head of wealth management, then group chief executive. Resigned in February 2009

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John Costas, former investment bank CEO and head of DCRM. Left in 2007

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Huw Jenkins, former CEO of the investment bank. Stood down in October 2007

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Peter Wuffli, former group chief executive. Ousted in June 2007

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Marcel Ospel, former chairman. Retired in April 2008

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Bradley Birkenfeld, former private banker. Arrested in May 2008 and sentenced to 40 months in prison in January 2010

Catching up in fixed income

There were problems with the venture from the start; not least because its governance model was horribly confusing. DRCM - which went into full operation in 2006 - was held within UBS's global asset management business for reporting and management purposes, but the investment bank was exposed to the risk and reward.

Moreover, while the hope was that DRCM would raise $5bn of third-party money, it raised only $1.3bn. UBS put in $3bn to seed the fund and transferred assets from the investment bank's proprietary trading businesses. DRCM was to be provided with $100bn net balance sheet funding at UBS cost of funding.

DRCM left the investment bank with other problems. The pool of potential candidates for a new CEO was shallow. UBS chose Huw Jenkins, who had been appointed head of the bank's award-winning equities business the year before, but he had no knowledge of the fixed income business, which was seriously weakened by the loss of most of its best traders to DRCM and lagged behind competitors.

Insiders say that Mr Jenkins was under huge pressure to close the gap with competitors at speed. During a video conference with 700 senior UBS bankers in 2006, Mr Ospel told them he was tired of the 'under construction' sign hanging over the fixed income division. This pressure, combined with UBS's risk management bias, pushed Mr Jenkins towards securitisation and the fast-growing but complex area of collateralised debt obligations (CDOs).

The collision of UBS's risk management model with the flawed assumptions surrounding the securitisation market was to prove catastrophic.

CDO nightmare

Investment banks had for years been packaging home loans into new securities. As the credit boom accelerated, UBS traders stopped selling the supposedly safest part of the CDO structure - the super senior, AAA rated securities - and structured the super senior tranches so that UBS was not exposed to the first 2% of any loss. According to UBS's risk model, this meant the securities piling up on UBS's CDO desk (and in DRCM and the bank's own treasury division) were risk-free.

With no aggregate limits placed on CDO holdings, the bank began to warehouse a huge amount of subprime-related assets. The merry-go-round was fuelled by UBS's funding structure, which used the private bank to subsidise the investment bank's activities and provided internal departments with money at UBS's own cost of funding.

Because the retained assets were seen as risk-free, they were not included in the risk reports prepared for senior management. Until the market began to unravel, senior investment banking executives and the board remained oblivious to the dangerous subprime exposures building up across the bank.

The blinkers started to come off in March 2007 when losses at DRCM began to emerge. Within weeks, it had written down its subprime CDO portfolio by $204m. In May, DRCM was closed and absorbed into the investment bank. But these losses were to be just the tip of the iceberg.

By June, Mr Wuffli - blamed for his role in setting-up DRCM - had been ousted, to be replaced as group chief executive by Marcel Rohner, previously head of UBS's wealth management business. Only in August, when the wholesale markets froze, did UBS senior executives realise the enormity of the bank's position: it had built up a holding of $50bn in super senior CDOs, and now it was too late to sell anything with even the whiff of subprime.

In October 2007, UBS revealed its first losses of $4.4bn. Mr Jenkins stood down and Mr Rohner was forced to temporarily take charge of the investment bank, too. In December, the bank announced a further $10bn of losses, forcing Mr Ospel to get a cash injection from the Government Investment Corporation of Singapore. The pain continued: in January 2008, another $4bn of losses followed; in April, a further $19bn of writedowns forced Mr Ospel into retirement and Peter Kurer, the bank's general counsel, to step in as chairman.

Such was the horror in Switzerland that the Swiss Federal Banking Commission demanded a report to explain how the bank had got into such a fix. In April 2008, UBS issued a document that astonished the financial industry. It spelled out in painful detail how naïve Switzerland's biggest bank had been. In presenting the report to the bank's annual general meeting that same month, Mr Rohner's humiliating admission was that the bank had "not been able to see the wood for the trees".

He laid out plans to reduce risk, shrink the balance sheet and simplify the fixed income division. To calm investors, Mr Rohner said the bank would rebuild its business around the things it did best: it would fall back on the 'backbone' of UBS's business, the global wealth management franchise.

That crutch was about to be taken away.

The Rise and Fall of UBS 1997-2003

The Rise and Fall of UBS 1997-2003

The Rise and Fall of UBS 2004-2010

The Rise and Fall of UBS 2004-2010

Asset-gathering monster

When UBS acquired US retail brokerage Paine Webber in 2000, analysts may have baulked at its $12bn price tag, but nobody denied the strategic value. It gave UBS a brand and critical mass in the US, and the wealth management asset-gathering machine a huge boost. The combined entity had $416bn in private client assets, with about half of its private client business now coming from affluent clients in the US. Total client assets at the bank leapt above $1000bn for the first time.

UBS became an asset-gathering monster. By 2006 it had made 10 further wealth management acquisitions and by August 2007, it had €880.8bn in private client assets under management, more than double that of its nearest rival, Credit Suisse Private Banking. Between 2003 and 2007, net profit in the wealth management division rose from CHF2.6bn to CHF6.9bn.

But the aggressive growth strategy that the Paine Webber acquisition had unleashed led to growth at virtually any cost. UBS seemed not to care where the assets came from or how profitable they were. Offering cash deposits at zero margin, the international wealth management landgrab was subsidised by the Swiss business. Behind the impressive headline figures, costs were high and return on assets negligible.

More importantly, the acquisition set in train the private bank's downfall. When UBS bought Paine Webber, it entered into an agreement with the US's Internal Revenue Service that required it to disclose information for its US clients holding US securities in their accounts. As the current US tax probe has laid bare, to evade those reporting requirements, UBS executives began routinely to help US taxpayers open accounts in the names of sham entities.

In 2008, problems in the wealth management business began to spiral out of control. It began in August the year before, when former private banker Bradley Birkenfeld first came forward to US authorities and began providing inside information on how UBS was helping thousands of Americans hide assets in secret Swiss accounts. According to Mr Birkenfeld, driven by demands from senior management and incentivised by big bonuses, client advisors were pushed to break internal guidelines and US laws. He claims to have pointed out the irregularities in 2006 to Mr Rohner and Mr Kurer, but no substantive change occurred to the bank's processes.

In May 2008, Mr Birkenfeld was arrested and charged with conspiracy to defraud the US government by helping tax evasion. He began a 40-month prison sentence in January 2010.

Auction rate securities scandal

At the same time, another scandal was erupting. In February 2008, the $300bn auction rate securities (ARS) market went into meltdown, leaving tens of thousands of investors with billions of dollars in losses if they tapped their account; assuming they could liquidate their holdings at all.

Shortly afterwards, UBS, one of the biggest underwriters of securities, and several other brokers were sued for fraud by regulators in Massachusetts and New York, accused of continuing to sell the products even as senior managers knew the auctions were failing. Marketed as a highly liquid alternative to cash deposits, court documents showed that banks - which collected huge fees for running the auctions - had been intervening on a regular basis to prevent the auctions from failing.

By August 2007, UBS's own inventory had swelled to $3bn, from $1bn five months earlier, according to the New York suit. This began to raise red flags with UBS risk managers. According to e-mails quoted in the New York action, in a video conference on August 22, David Shulman, head of the group that ran the UBS auctions, urged the bank's more than 850 brokers to promote the product to the firm's wealth management clients as the most effective way of cutting the bank's exposure.

By early December, with the bank's inventory still building and his direct reports telling him that the auction mechanism was failing, e-mails from Mr Shulman, quoted by the New York attorney general, show that the bank was still trying to offload the product on both private and institutional clients. One e-mail stated: "I understand completely the need to move this paper down... Despite being very hostage to the [wealth management] franchise for distribution of these products (we are pressing as hard as we can), we are reaching deep into the institutional client base to take these."

On December 13, Mr Shulman cut his personal exposure: e-mails reveal that he sold his entire portfolio of $1.45m of auction-rate securities to the bank's own trading desk.

In February, participating banks stopped buying ARS at auction. Within days, the market came to a standstill.

Although UBS has always denied any wrongdoing, in August 2008 it came to a settlement with various state and federal regulators, agreeing to buy back $19bn of the securities it sold to investors.

In February 2010, Mr Shulman, who was suspended by UBS in July 2008, agreed to pay $2.8m to settle allegations that he dumped his personal holdings after acquiring inside information.

UBS in free-fall

Throughout 2008, UBS was unable to steady itself. Mr Rohner found a new CEO for the investment bank in the shape of former Morgan Stanley equities banker Jerker Johansson, but announced a further loss of CHF11.5bn for the first quarter. As the bad news kept on coming, Mr Ospel was forced to retire from the bank he had built.

In June 2008, UBS successfully executed a CHF15bn rights issue, but it was not enough. By October it was forced to go cap-in-hand to the Swiss government, taking a cash injection of CHF6bn in return for a 9.3% stake, and offloading $60bn of toxic assets into a new central bank 'stability' fund. Then, in November, Raoul Weil, who had been appointed head of the wealth management business when Mr Rohner became CEO of the group, was charged with conspiring to help Americans hide $20bn of assets from the US tax authorities. He is still unable to leave Switzerland.

At the start of 2009, UBS continued to free-fall. The year began with the bank posting a 2008 loss of CHF19.7bn, the biggest ever for a Swiss company, and slashing 2000 jobs. In the same month, it pleaded guilty to the US tax evasion charges, agreeing to a $780m fine and 'deferred prosecution'. In February, the Swiss regulator FINMA ordered UBS to identify certain US clients to settle criminal fraud charges; then, in August, the Swiss agreed to hand over the details of about 4450 bank accounts to the US authorities, effectively ending a separate civil lawsuit by US authorities that sought up to 52,000 account names.

The scandal in the wealth management business forced Mr Rohner, previously its head, to resign; he was replaced in February 2009 by Mr Grübel, a career-long Credit Suisse banker, hugely respected in Switzerland and seen as responsible for turning around a failing Credit Suisse earlier in the decade. While shareholders and the Swiss elite welcomed Mr Grübel's arrival, outflows from the private bank continued to accelerate. When, in November, the bank announced its fourth consecutive quarterly loss for Q3, it revealed that in the third quarter alone, the private bank had seen outflows of CHF36.6bn. They doubled again in Q4. By year-end, UBS had seen more than CHF300bn removed from its wealth management business.

Swiss court rules against own regulator

With a new leadership team in place, and the management responsible for the various debacles gone, UBS hoped that Mr Grübel and his managers could get on with the job of rebuilding the bank and rejuvenating its tattered reputation. Having instituted savage cuts (more than 11,000 jobs worldwide) and urging UBS bankers to "live the values of truth, clarity and performance", Mr Grübel started to turn the bank around. While the second and third quarters had turned in a net loss, both had shown an operating profit; in Q4, the bank posted the first quarterly net profit - of CHF1.2bn - in more than a year.

But the drama was to take yet another twist. In January this year, a Swiss court ruled that Swiss regulator FINMA had broken bank secrecy law when, in 2009, it ordered UBS to hand over 300 client files to US authorities. This threw into doubt Switzerland's ability to deliver the 4500 names as agreed and threatened to revive the suspended civil lawsuit. It leaves UBS in limbo; caught in the eye of a much larger storm over which it has no influence.

In Switzerland, the row has been catastrophic, striking at the basic tenets of Swiss banking. It has shocked the nation. From being a national champion, UBS became public enemy number one; charged with bringing Swiss private banking to its knees. Scenting weakness, other governments seized the opportunity to try to weaken Swiss banks' secrecy and claw back unpaid tax: the German and French governments caused public outrage and a diplomatic furore by obtaining stolen bank data. UBS had already prohibited a number of employees from travelling to the US because of the tax investigation; since the data row erupted, other private banks have banned employees from travelling abroad - particularly to France or Germany - fearing that bankers could be taken into custody.

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Alex Wilmot-Sitwell: the 13-year UBS investment banking veteran is now co-head of the investment bank with Carsten Kengeter

A franchise worth saving

Against all these odds, UBS has a business to save. When Mr Grübel took over in February 2009, his plan was simple: increase the bank's capital ratio, cut costs and return to profitability. He has done all three, hitting cost targets a year early. There have even been some big figure successes: the bank's equity capital markets' revenues shot up by 65% in 2009, to CHF1.6bn, constituting the bulk of investment banking revival in Q4. Its sovereigns, supras and agencies business worked on 49% of all deals involving governments' financial investments in 2009. Excluding Japan, its Asia business grew investment banking revenues by 60%, holding onto its commanding lead in the region.

These figures add up to more than Swiss francs on the bottom line. They signify the maintenance of crucial client relationships and the survival of the culture. While Mr Grübel cannot take all the credit for this, he made some clever choices early on.

One of them was to immediately replace investment bank CEO Mr Johansson with new co-heads, Alex Wilmot-Sitwell and Carsten Kengeter. The appointment of co-heads is usually born out of compromise and this one was no different: UBS had no single banker with the expertise to span both the investment banking and the fixed income universes, a shortcoming which lead the bank into its CDO nightmare in the first place.

Mr Grübel's gamble has paid off. Investment banker Mr Wilmot-Sitwell - a highly respected 13-year UBS veteran - has been able to command the loyalty of the firm and prevent an exodus of UBS bankers. There have been losses - such as Jim Renwick, a highly rated equities banker and vice-chairman of the investment bank, and Jonathan Brown, the bank's European head of bond syndicate and one of the industry's best-known emerging markets bankers, both of whom decamped to Barclays - but many of UBS's most senior bankers have proved remarkably loyal to the bank. Mr Wilmot-Sitwell has also been critical to clients keeping faith with the firm, maintaining close relationships and winning business with key clients such as mining group Xstrata and the UK's Lloyds Bank.

Mr Kengeter - a former Goldman Sachs partner drafted in as head of FICC in 2008 - spent more than seven months cleaning-up the bank's fixed income mess and is now rebuilding the franchise. He has had sufficient pulling-power to encourage big names to join the firm. He enticed Rob Joliffe, a former Royal Bank of Scotland syndicate and origination head, out of retirement and into the central role of global head of debt capital markets. Mr Kengeter has also built a powerful trading engine around industry heavyweights Rajeev Misra, global head of credit, Dimitri Psyllidis, global head of macro, and Chris Vogelgesang, co-head of foreign exchange trading.

Rebuilding the bank

In the bank's head office on Bahnhoffstrasse in Zurich, Mr Grübel says UBS has come a long way, but is realistic about the challenges the bank faces. He has, after all, seen much of it before; there are many parallels with the problems faced by Credit Suisse years ago, but UBS's problems are much greater, he says.

"UBS is a much bigger bank, with many more employees. And the backlash against the bank in Switzerland and in the US has been very destructive. This destroys morale and creates a vicious circle: bankers and clients leave; more bankers and clients follow. [But] UBS still has a very strong investment bank, with some parts, such as equities and foreign exchange, performing extremely well."

The tipping point came at the end of Q3 last year. By then the bank had turned in two quarters of operating profit. While the significance of achieving an operating profit did little to assuage the Swiss public (they would rather see low-quality profit than a high-quality loss, says Mr Grübel), inside the bank a new, more optimistic mood was emerging. "It takes more than one profitable quarter to turn a bank around, but bankers started to talk about the future; about opportunities," says Mr Grübel.

Aside from maintaining profitability, UBS's biggest challenge is to stem the outflows from the wealth management business. In terms of public relations, the bank has not done itself any favours. Client outflows are not just driven by loss of reputation; they are also a function of headcount cuts. When you cut private client advisers, you typically lose about 40% of the client assets they managed; moreover, there is generally a six-month timelag between when the adviser leaves and when they turn up at another firm, which is when the outflow occurs. UBS made savage cuts in the early part of 2009 (although Mr Grübel admits that 50% of the advisers were "lost", not cut) which explains the accelerating outflows in Q3 and Q4. But balancing headcount with asset outflows, UBS's retention rate of about 65% is largely in line with industry averages.

Mr Grübel agrees that the bank has done a poor job in communicating this dynamic as well as other factors, such as the sale of Pactual, which led to the loss of more than $5bn in client assets, and the recent Italian tax amnesty, which led to more than CHF14bn being repatriated. "We have not explained it well; we have to communicate better," he says.

More importantly, the bank is seeing new money coming into the wealth management business, led by positive growth in Asia-Pacific. "The money coming back is not yet enough to offset outflows, but it's a beginning," says Mr Grübel. He cannot promise that the outflows have bottomed out, but argues that the repair cycle is about two years. "If we take the height of the crisis and the beginning of outflows to be the end of 2008, then we are looking towards the end of 2010 for a real recovery. But you have to remember, we are still the biggest wealth management business, with more than CHF2200bn in assets."

The repair of the private bank has required a fundamental rethink. Mr Grübel says a large part of the bank's problem was a result of how it had been built. "It was all about getting assets in, with little focus on whether they were profitable. We've had to rethink that. We have to service our clients better and that means integrating the bank better. If you have a positive relationship between the investment bank, asset management and the wealth management businesses, you generate the right products and the right advice for clients. If you deliver what the client wants, they are prepared to pay for it."

To this end, in February UBS appointed Andreas Amschwand, the bank's former foreign exchange chief, to lead a new investment products and services unit which integrates middle-office functions that used to be separate for each UBS division. The unit, which will be part of the wealth management and Swiss bank division, will be divided into three service elements - wealth planning, investment management and capital markets - and will provide support to UBS client advisers in Europe and Asia. It may eventually be expanded to include wealth management in the Americas.

Fixed income build

At the investment bank, the focus is all on the fixed income business. "You cannot have a very profitable investment bank without a good fixed income department, and that has historically been our problem," says Mr Grübel.

So far, it looks as though Mr Kengeter is making all the right moves. Although he is unable to disclose numbers, Mr Kengeter says that between 2008 and 2009, the profitability of the rates business has roughly doubled and that, if the "legacy asset bucket" is discounted, UBS's FICC division generated more profit in 2009 than it has ever done before.

His first priority was to "renovate" the business. In practice, this meant firing a huge swathe of the fixed income sales and trading division and replacing them with better people who had a greater understanding of risk management. The second part of the strategy was to improve the communication between sales and trading, and thereby create a more productive dialogue between the salesforce and clients.

"Historically, this division was position oriented, with very little communication between the sales and trading people. We have created a culture of information sharing. This increases the dialogue with clients in terms of frequency and content. And that translates into more opportunities for the client and the right opportunities for the bank," says Mr Kengeter.

Having cut out the dead weight in the early part of last year (as well as losing a few bankers he would rather have kept), Mr Kengeter set about hiring hundreds of new fixed income bankers, surprising competitors by his ability to attract big names from stronger firms. He began by repopulating the macro business - boosting the power of the bank's foreign exchange and short-term interest rate franchise - and then rebuilt the credit business, with senior hires in the investment-grade and high-yield-flow businesses. He says the fundamental building blocks are now in place.

Mr Kengeter stresses that he has not lured people with UBS's chequebook. Instead, it has been about convincing people of the "optionality" in the UBS proposition. "As last year went on, it became increasingly evident to people that they had the opportunity to come into the bank at the low point and participate in tremendous upside. This has enabled us to hire the best-of-breed," he says.

To get UBS back on track and placate regulators, it has had to flog some jewels along the way: this has also meant losing some of its revenue generation capability. Selling Brazil's Pactual back to Andre Esteves - the charismatic investment banker who sold it to UBS in 2006 - and thereby slashing UBS's exposure to one of the world's most vibrant economies, was a very low point, about which Mr Grübel says he is not proud. But it was a necessary and unavoidable part of rebuilding the bank's capital, he says. "There was very little else we could do," he admits. "Pactual was a relatively small piece that could be easily separated from the rest of the business."

A similar rationale dictated the bank's virtual exit from commodities, where it hived off chunks of its business to JPMorgan and Barclays Capital. But can you have a good FICC business without commodities? "We sold them because they are relatively discrete divisions, so it was easy to exit them without damaging the rest of the business," says Mr Kengeter. "There is no doubt that it damages the diversity of our product range. We will have to analyse if and when we can sensibly re-enter those areas."

Rebuilding trust in UBS is going to be a long-haul. Nowhere is this going to be more tricky than in the US, where its business has been decimated. Many believe that the bank has a winning management team in place. The hiring of Robert McCann, former head of Merrill Lynch brokerage, as chairman and CEO of Wealth Management Americas, is seen as a big step forward. Moreover, Robert Wolf, the chairman and CEO of UBS Group Americas - who is also a member of US president Barack Obama's Economic Recovery Advisory Board, chaired by Paul Volcker - wields serious political clout. But whatever their powers of rejuvenation, much depends on the outcome of political and diplomatic machinations between the US and Switzerland.

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Carsten Kengeter: the former Goldman partner was drafted in to UBS as head of FICC in 2008

Ambitious targets

Mr Grübel has set the bank some ambitious targets. Within three years, he wants the group to earn CHF15bn in profit before tax. In the investment bank, he expects a profit before tax of about CHF6bn; and about CHF4.6bn in wealth management. That means returning revenues to where they were at the height of UBS's powers in 2005. Some analysts are sceptical that this is feasible, particularly given the fragility of the global economy.

Mr Grübel is aware it will be a hard slog, but he says the numbers are not as unrealistic as they look. "The targets look difficult to achieve because of where the bank is coming from; but they are not so difficult if you look at the size and the quality of the business. So far, things look promising," he says.

There are complications, however. Mr Grübel may want to grow the bank, but Swiss supervisors want it to shrink. Having been caught out once, Swiss regulators are crafting new rules aimed at keeping UBS and Credit Suisse out of higher margin, risky business and focused on safe businesses, such as looking after rich people's money. Striking a balance between making the bank safer at the same time as increasing profitability could hinder Mr Grübel's ambitions.

This also neatly encapsulates one of Mr Grübel's most sensitive problems: stopping Swiss politicians from meddling in the bank's affairs. It is clear that the bank is under political pressure to moderate compensation. When he disclosed in February that UBS would not disburse about CHF300m - nearly 10% of the bonus pool - to senior staff because the bank had failed to make a net profit for 2009, Mr Grübel said bluntly that he expected executives to be "realistic" about pay. Bank salaries and bonuses are politically influenced and have become a controversial public topic as never before, Mr Grübel told employees at the time.

But despite disappointment about the compensation plan, Mr Grübel says he does not expect an exodus of bankers, saying: "The feedback has been reasonably good."

And, Mr Grübel has done everything in his power to escape state influence. UBS was quick to get the government out of its share register: the sale of its CHF6bn stake in August 2009 generated a profit of CHF1.25bn profit for the government (equating to 2% of the state budget, notes Mr Grübel). The bank hoped this would remove any idea that the state had the right to interfere. Mr Grübel says the bank also offered to buy back the securities being held in the central bank stabilisation fund - with a current market value of about CHF20bn - but the offer was refused.

This is a clear signal that the Swiss central bank and regulators want to retain a certain level of influence over the bank's operations - and neither bankers nor investors will like that.

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Looking forward: after almost three years of relentless bad news at UBS's Zurich headquarters, recent results have given some cause for optimism

New culture, old culture

What regulators, investors and clients will want to see is a new risk culture at the bank, but one which harnesses the best of the bank's old culture. It was this indefinable glue that has held the bank together and made the Grübel-led turnaround possible. Both he and Mr Kengeter are keen to point to the loyalty that has kept the firm going, and admit not a little surprise that more bankers did not jump ship. Both men believe the bonds which have been forged in survival are a solid foundation for a revived UBS.

Many hope that Mr Kengeter will bring the best of Goldman's enviable risk management skills to the fixed income business. He says UBS has been careful to avoid the mistakes of the past - where ramping up the business at speed led to weak risk management. "Fixed income has the biggest impact in terms of risk and profit and loss, so it must be embedded within the rest of the firm and held to account by strong risk managers," he says. "Any good risk culture is based on a healthy dose of paranoia; if we haven't got that from the near death experience UBS has experienced, then we never will."

The investment bank has a new head of risk management, Tom Daula, who joined in 2008 from Morgan Stanley, and Mr Grübel is taking a very hands-on approach. "The structure is radically different, with new people and new rules. We have a risk meeting every week and I have calls with senior bankers every day. I am kept informed," says Mr Grübel. Most importantly, he says that risk management heads cannot be over-ruled by anybody. "Risk management has real power and real accountability," he says.

If proof were needed that a bank can come back from the brink, then Credit Suisse is a prime example. As then, Mr Grübel and his team are building an increasingly compelling business proposition. But there are still many challenges ahead, not least the sword of Damocles that hangs over its head in the form of the deferred prosecution relating to the US lawsuit.

As Mr Grübel points out, UBS has fulfilled its side of the bargain: it paid the fine, changed the way it operated and handed over the names. Now all the bank can do is wait for governments and courts to come to an agreement. But with the Swiss courts digging their heels in to protect the country's most profitable industry, and the US benefiting from the push that the scandal has given to asset repatriation and new agreements with previously secret jurisdictions, it may be a long time waiting.

The bank must also close the yawning gap with competitors at a time when the global economy could be entering another volatile and dangerous phase.

With parts of the bank still in recovery and other bits sold off, does it have the revenue-generating capacity to catch up?

Some analysts argue that the shrunken investment bank balance sheet - cut from CHF2500bn in Q2 2007 to CHF992bn at the end of 2009 - could hobble UBS. A key element of Mr Kengeter's fixed income strategy hinges on the creation of a flow machine in credit - turning around high volumes of trades quickly, where it will be competing against entrenched players such as Barclays Capital and Deutsche Bank. Mr Kengeter says that the balance sheet is strong enough, and that success will be driven by "intelligent, rather than undisciplined" use.

Mr Grübel knows there are no quick fixes and is prepared for the uphill battle. "We have structured the bank so that what happened should not happen again. We have increased discipline and accountability across the firm. But I learned from Credit Suisse that to repair your reputation, you not only have to catch up, you have to be better than your competitors."

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