I.

Executive Summary

The study was done to assess the UBS in taking an appropriate responsibility for making

and taking in its decision in utilizing risky and complex financial instruments. Upon looking with

derivatives, a financial instrument, as said by Freadrich, Ferrell and Jackson it offers the

possibility of large rewards, but poses also high amounts of risk. Its basic premise is to transfer

risk among parties based on their willingness to assume additional risk, or hedge against it.

The study provided facts that UBS or is formerly known as United Bank of Switzerland

has overall invested assets of approximately $1.3 trillion. Later in year 2000, it acquired

PainneWebber Inc. After three years the bank rebranded under the UBS name. The bank started

to encounter problems when they started to operate as a large company and gone under scrutiny

for their current questionable practices. It also encountered problem due to the use of derivatives

that exposes investors to counter-party risks.

Escalante, Maria Jhasmin D. (2015170161)

BSAT

II. Statement of the Problem

UBS as a diversified global financial services company and the worlds largest manager

of private wealth assets, despite of its huge name in the financial industry was accused by tax

evasion and suffered also from subprime crisis due to its heavy dependence on derivatives and

mortgage-related securities. Thus due these problems, UBS will now focus working with

efficient and effective balancing of compensation, capital expenditures, and investors return.
Tax Evasion

It was found out by the Internal Revenue Service in the year 2008 that there are

approximately 20 000 American clients suspected of hiding money in assets at the amount of $20

billion to intentionally avoid at least $300 million in federal taxes of funds in offshore account.

However, this issue was complicated due to tax evasion is not a crime in Switzerland and using

offshore accounts were not illegal either. Consequently, this made the reputation of the bank to

be damaged by prudence.

Dependence on Derivatives and Mortgage-Related Securities

It was known that before the year 2008 ended, the bank was forced to write down its losses

in bad mortgages and derivatives of over $46 billion. The bank suffered more losses than any

other lender in Europe.

III. Causes of the Problem

Having problems, struggles, troubles and mistakes are inevitable. These things may be

big or small will eventually bring growth in a company once learned and solved. Sometimes, the

desire to be profitable can either bring forth the company into success or into losses. For the

problem and issues found to be eliminated, identifying the origin or the cause why it arose is

very essential. It will help the decision maker in leading into the right procedure to get rid and

finally to avoid the same mistake or struggle happen again inside or outside the company.
Tax Evasion

Former bankers, Mario Staggle and Bradely Birkenfield in May 2008 were indicted. They

helped American property developer evade taxes by creating bogus trust and corporations to hide

ownership and control of offshore assets. They were also accused by helping and advising clients

to file a false tax return by destroying bank records.

Dependence on Derivatives and Mortgage-Related Securities

The bank started investing in asset backed security (ABS) in the year 2002. Due to its

aggressive global expansion, UBS was exposed to subprime mortgage crisis. Poorly developed

financial model has also its contribution in causing losses leading the bank into over-value and

take long positions on many derivative positions.

IV. Decision Criteria and Alternative Solutions

According to John Gapper, "...investment banking is a volatile business that demands

strict management". There are various areas to be looked on that can be possible criteria for

decision making and for building alternative solutions for the company. UBS reflected with their

issue of tax evasion and loss for a long time that caused Swiss National Bank to bail it out.

Top management was too complacent, wrongly believing that everything was under

control, given that numerous risk reports, internal audits and external reviews always ended in a

positive conclusion, and "the bank did not lack risk consciousness; it lacked healthy mistrust,

independent judgment and strength of leadership. was concluded by Prof Straumann.

The following can be the possible needs of the company:

 Strong internal risk management or a standard of risk

Information sharing

These possible solutions were acquired by further study and research about the bank's issue about

tax evasion and derivatives. The researcher believes that these proposed possible solutions will

greatly help the company to if not avoid, at least minimizing the chance to suffer in the same

mistake again. Since the UBS said that they will work on efficient and effective balancing of

compensation, capital expenditures and investment returns, the researcher had the following as

criteria for making possible solutions: Risk levels and return of investment.

Risk level is an important criterion to look on, this will determine if how much the

company let itself expose in a certain level of risk. In UBS, obviously it exposed itself too much

with the risk when they chose to depend with derivatives. Return of investment is interrelated

with taking in consideration the risks. Investing is a risky activity; an organization can either

have high return or no return at all and UBS loss huge money by not checking how much they

are exposed in the risk. The importance of assessing risk valuation models and controls through

a risk department as well as external agencies are not for textbooks in finance alone but to be

implemented and listened to with caution., said by anonymous.

V. Recommended Solution, Implementation and Justification

In every situation, it is always important to have the lessons learned. And instead of

focusing in the problems, choose to be wise and responsible enough for making another decision

that can be beneficial or not to the company.

 As seen that one of the common problems in financial industry was its corporate culture

that was built on rewards for taking risks rather than rewards for creating value of stockholders

that triggers the people inside an organization to take the risk of investment even without a

thoroughly study and research. The researcher recommends following the proposed possible

solutions.

The first possible solution is having a strong risk management or a standard of risk. This is

under the process of planning. This includes objectives and goals that is associated to accounting

controls and be given to a trustworthy person and has also integrity, ethical and professional

behavior that will present the accounting reports completely and neutral that can be reliable. It is

also a better procedure of internal risk management if the company asks for consultation with

experts about their recommendation for risks. The company should also have this certain allowed

level of exposing the company into risk. Through this, the company will be able to control the

risk and will also be able to choose the right investment and financial instrument where the

company will be highly benefited.

On the other hand, for the risk management to be effective, sharing of information is

necessary. Sharing of information includes planning which covers the proper implementation of

the company to its plans especially in investment banking. Moreover, narrow and opaque

framing is also included. Practice of simplifying complex decision problem by breaking it down

into smaller parts and focusing on a certain part alone as if each part is not interrelated is called

narrow framing. This will greatly help the company. Example of this is the segregation of duties

and responsibilities to the company's different management; through this the workers will have a

clearer sense of duty. Meanwhile, transparency and opaque framing is somehow alike yet the

latter involves level of clarity of decision task and associated consequences. These two are
important in decision making, narrow framing is that your scope and limitations will only be in

the extent of the duty given to you and will lessen the sharing of complex information. In this

area, the experts are allowed to talk about their specialization and decision makers to listen to

them and take into consideration everything that has been discussed such as suggestions and

recommendations, dos and donts. And opaque framing to effectively evaluate and deliberate the

laid down decision and which is or are to take. Through these two said framings, the companys

executives specifically UBSs executive as now operating as a large company will help them to

thoroughly think and be cautious enough in exposing themselves to a large risk.

It is really important that transparency is present in an organization like UBS, as well as

planning of strategies while having a heedful analyzation and taking into consideration each

suggestions and recommendations given by the experts. It will also bring betterment if rewards

will be given to those who successfully created and increased the value of stockholders. It will

also increase the control and management of the company if it has segregation of expenses like

tax to effectively manage cutting costs and financial reports to be accurate that will definitely

help the decision makers make an economic and risk management decisions that will highly

benefit not only the company but also the society.

REFERENCE

O. C. Ferrell, J. Fraedrich. & J. Jackson. (2009). Business Ethics 2009 Updates: Ethical
Decision Making and Cases. Retrieved from https://books.google.com.ph

The Telegraph. The Crisis at the Heart of Swiss Bank. (July, 2008).
Retrieved from www.telegraph.co.uk

J. Gapper. (December 2012). Financial Times. UBS never took enough interest in its risk.
Retrieved from https://www.google.com.ph

The Finance Proffesionals' Post. How Psychological Pitfalls Generated the Global
Financial Crisis. (n.d.). Retrieved from post.nyssa.org

Finance Train. Case Study: Equity Derivative Losses at UBS. (n.d.).

Retrieved from https://financetrain.com

A. Cox. (June 23, 2015). B2T. Choose the Right Decision Criteria.
Retrieved from https://www.b2ttraining.com/choose-the-right-decision-criteria/

UBS and The Subprime Mortgage Crisis. (n.d.)

Retrieved from www.icmrindia.org