Milan fraud trial adds to UBS reputation woes

An Italian judge has ordered UBS, and a group of other financiers, to stand trial for fraud on May 6 regarding their handling of interest rate swaps acquired by the Milanese authorities in 2005.

The prosecutor, Alfredo Robledo, said UBS misrepresented the benefits of a debt restructuring exercise, involving interest rate swaps.

“The city was not deceived,” maintains the bank in a statement emailed to Swisster by UBS’s Milan office.

Municipal authorities across Italy planned to lower interest payments on 1.7 billion euros (2.46 billion francs) of loans, by swapping their fixed-rate payments for variable rates, using derivatives instruments fashioned by UBS.

Unfortunately for the authorities, the interest rates look like rising and municipalities have already made huge losses by entering into the derivatives contracts.

“No fraud was committed by UBS . . . no illicit profit was earned by the banks,” said the UBS statement.

Milan, Italy’s financial centre, is suing the group of financiers in the civil courts for 239 million euros in total liabilities.

UBS may not be able to make clients of Italian authorities in future.

Prosecutors in Puglia in the south of the country are already seeking to bar Merrill Lynch, part of Bank of America, from public procurement contracts, as a result of separate derivatives deals which have led to huge losses.

UBS has also been implicated in problem deals with Greek public authorities.

The bank was named in an article on in The Sunday Times newspaper on February 28, which analysed a testimony before the UK parliament given by an executive from Goldman, the investment bank accused of helping the Greeks use derivatives to hide their debt.

The article said UBS, and other banks, made deals with the Greek government covering revenues from the national lottery and payments to boatyards for building warships.

UBS declined to answer specific questions from Swisster over whether the bank was providing derivatives services to the Greek government.

Spokesperson, Sabine Jaenecke responded: “UBS has no particularly large exposure to Greece."

UBS chief executive, Oswald Grübel, now 13 months in the job, was aware of the bank’s major image problems when he took up the post.

At that time UBS, and the government, were being lambasted by the public for capitulating to US demands for client account data.

The bank had also begged a bail-out of 6 billion francs in cash from the state in order to keep business running.

“Returning the group to profitability will only be the beginning. The recovery of our reputation will require hard work and relentless effort,” said Grübel in a letter to employees in September.

But the chief executive has reportedly received 24 million francs worth of share options on top of his 3 million franc salary, even while posturing that he would forgo his bonus due to the bank’s poor performance.

The bank released its compensation – executive pay – report in the same week that Swiss parliament has been debating new rules on fat-cat salaries.

“UBS has a lot of work to do,” said Martin Naville, CEO of the Swiss-American Chamber of Commerce.

Grübel has tried to spread the blame on banking secrecy, preparing a report for parliament earlier in March which revealed that 20 other Swiss banks have violated American laws in their operations.

But an industry source said no other Swiss banks are involved in swaps deals with Italian local authorities.

Naville plays down the Italian issue seized by the international press this week.

“I would completely forget this Milano thing . . . it is not uncommon for a global institution to have operational problems,” he said.

“I see no evidence that the reputation of the financial market or the country has suffered.”

“A lot of people still hold Switzerland in high regard as a custodian of money,” said Naville.

Swiss Presence, a federal foreign ministry agency, has recently conducted image research, polling 1,000 Americans and a further 400 ‘opinion formers’ across the Atlantic to try to gauge what effect the problems of UBS et al have had on people’s perception of Switzerland.

Swiss Presence would not comment on UBS’s reputation before the results of the survey are presented by agency head, Johannes Matyassy, on March 26 in Bern.

“I’ve seen the data which we’ll show next week and it’s excellent,” said Naville.