Author's Blog: “The Mess at UBS”: Subprime Losses and the Halo Effect

Swiss banking giant UBS is getting plenty of attention from the press – and most of it for the wrong reasons — following a $18.4 billion write-off from subprime mortgage securities In its March 3 issue, Business Week ran a feature story titled “Behind the Mess at UBS.” According to BW, the worst may not be over – future write-downs are likely. More grim news may be ahead.

So it was not surprising that Swiss Radio contacted me last week to speak about UBS and its performance. The interviewer’s first question was about the general tendency for high performers to falter in subsequent periods – were UBS’s losses one more example of how yesterday’s heroes become tomorrow’s bums? Was this proof that UBS had feet of clay after all?

My answer: Yes and No. “Yes” in the sense that there is a strong regression effect in business, and high performance in one period is usually followed by lesser performance in the next. But the main answer is “No.” UBS’s massive losses are not an example of normal regression, and should not be allowed to cast a pall – a sort of negative shadow – on everything about the bank.

As I tried to point out, UBS is a large company involved in a full range of financial services, from mortgage loans to credit cards to retail banking. Ninety-nine percent of its activities are the same as there were last year, and 99% of its employees are doing the same good job they were doing one year ago. I’ve banked at UBS since arriving in Switzerland in 1996, and went by my local branch just last week. No difference was apparent!

It is very sad – and hugely dispiriting – for these employees to learn that their good efforts have been overwhelmed by the massive misjudgement of a few. These losses are real – and shameful testimony to failed choices, poor risk management, and more. Heads have rolled and surely more will – and one would hope that lessons will be learned to stop this nonsense. But to infer that somehow UBS screwed up and then to rethink judgments about things not related to credit losses – that somehow the people really aren’t that good, that the organization isn’t really efficient after all, that execution is poor company wide – well, those sorts of judgments are little more than attributions based on a shifting judgment.

It’s important to identify the source of these catastrophic losses, and to ensure they do not repeat. But that is no reason to infer that the entire bank somehow had “feet of clay,” or to let a negative halo – a set of horns – shape judgments beyond what is warranted.

Author's Blog

March 03, 2008

“The Mess at UBS”: Subprime Losses and the Halo Effect

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