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UBS Report Blames Lax Controls for Credit Losses

Poor risk control and a narrow focus on revenue growth at UBS's investment bank helped cause huge credit losses, UBS said on Monday, as it prepares to meet restive shareholders this week.

The subprime-battered bank blamed itself for a lack of risk control in a report ordered by Switzerland's EBK banking watchdog and said it had let the rapid build-up of its investment bank run out of control.

"The investment bank was focused on the maximization of revenue. There appears to have been a lack of challenge on the risk and reward to business area plans," UBS said about its fixed-income business.

The world's largest wealth manager has written down about $37 billion in assets -- more than any other bank -- and got rid of most senior management, including its chairman, after asking investors for emergency cash two times in as many months.

Roughly 16 percent of UBS's subprime losses were on the back of trading strategies in the Dillon Read Capital Management hedge fund unit.

Some two-thirds were attributable to the collateralized debt obligation (CDO) desk within UBS's fixed income business.

Other problems were confusion about management structures and cheap internal funding, the report said.

There were gaps in risk management and expertise, and the bank did not respond adequately when the sector started worrying about subprime exposure.

The report was a summary of a review UBS had sent to the EBK, which is probing the bank over its losses.

"We will proceed with our investigation. This is quite a big thing and it will take a lot of time," the watchdog's spokesman Alain Bichsel said.

Increasing Pressure

Shareholders will be asked to approve another 15 billion Swiss franc ($14.76 billion) capital increase at their annual meeting on Wednesday, bringing the total of measures to fortify UBS's balance sheet to around 34 billion francs.

The bank's share price has more than halved since June and it is under increasing pressure from shareholders, some of whom want it to split up its business, with speculation rising the bank could be taken over.

The bank will replace its chairman, Marcel Ospel, widely criticized for allowing UBS to take on risk in a bid to become the world's biggest investment bank, with Peter Kurer, the group's top lawyer.

Activist investor group Olivant -- controlled by former UBS chief executive Luqman Arnold -- has been the most outspoken critic of UBS's strategy, urging it to appoint a heavyweight banker at its helm, saying Kurer is the wrong choice.

Olivant has said it will not seek to force UBS's hand by rallying a wider vote at Wednesday's AGM, however.