The ambition: UBS’s growth strategy, 2005–2007

A universal bank in search of scale

The UBS that entered the crisis was the product of the merger of the Union Bank of Switzerland and the Swiss Bank Corporation in 1998 and of the acquisitions described in chapter G.I, among them the American brokerage firm PaineWebber in 2000. By the middle of the decade the group combined the largest wealth management business in the world, a Swiss retail and corporate bank with a dominant domestic position, an asset manager and an investment bank that ranked among the leading firms in equities and foreign exchange. Its management described the combination of these businesses as an integrated model in which each division supplied clients, products and funding to the others. Even in December 2007, after the first large losses, the chief executive Marcel Rohner declared that the combination of wealth management, asset management and investment banking in one integrated business remained the best model.¹

The strategy that UBS pursued after 2005 rested on the conviction that the investment bank had to close a gap with its largest American competitors. The bank’s own later analysis records that the investment bank regarded fixed income as the area in which that gap was widest, since its fixed income revenues had declined from 2004 onwards while those of competitors were growing. An external consultant retained by the bank in 2005 identified shortfalls in credit, securitised products and commodities. Its analysis named asset-backed securities, mortgage-backed securities and adjustable-rate mortgages, in each case including underlying assets of subprime quality, as significant revenue growth opportunities. In March 2006 a presentation to the Group Executive Board announced the build-out of a new securitised products group within the investment bank.²

Behind these plans lay a wider strategic ambition for the years 2006 to 2010. The group aimed at significant revenue increases while allowing only moderate growth in risk-weighted assets, a combination that favoured activities in which large notional positions consumed little regulatory capital. The balance sheet of UBS grew by around 17 per cent in each of the years 2005 and 2006, with the investment bank accounting for more than four fifths of it. Group Treasury observed at the time that this growth involved a build-up of less liquid assets. When in March 2007 a proposal came before the group’s risk committee to impose a hard limit on the investment bank’s illiquid assets, the proposal was not adopted, although a new funding model with haircuts for illiquid positions was approved.³ In retrospect the figures describe a bank whose total assets reached a multiple of the Swiss national product. The National Bank’s Financial Stability Report of June 2008 noted that the assets of the two big banks together amounted to about seven times Switzerland’s annual gross domestic product, and that their leverage remained very high despite recent efforts to reduce it.⁴

Dillon Read Capital Management

The most visible expression of the new ambition was an internal hedge fund. On 30 June 2005 UBS announced the creation of Dillon Read Capital Management (DRCM), headed by John Costas, until then the chief executive of the investment bank.⁵ The name revived that of the old New York investment bank Dillon, Read & Co., which the Swiss Bank Corporation had acquired in 1997 and which had been merged into the investment banking arm of the group.⁶ Part of the purpose was to keep talented traders within the group at a time when many of them were leaving large banks to found independent hedge funds. According to contemporary reports, UBS invested between USD 3 billion and USD 3.5 billion of its own money in the venture and committed guaranteed bonuses of around USD 1 billion over three years to retain its managers.⁷

The construction was unusual. DRCM belonged organisationally to the asset management division, but the investment bank remained exposed to its risks through controlled finance companies that held the positions. The bank’s own report later called this governance structure non-standard. It also found that DRCM had drawn on the group’s balance sheet at the group’s own funding cost, to an extent that reached around USD 100 billion of net balance sheet.⁸ The Banking Commission had approved the treatment of DRCM within the group’s consolidated supervision in March 2006, accepting the argument that separating proprietary trading from client business would reduce risk. FINMA later acknowledged that this assumption proved mistaken.⁹

The fund opened to outside investors on 1 November 2006. Within six months it had suffered losses on its American mortgage positions, which the bank’s report puts at USD 150 million for the first quarter of 2007.¹⁰ On 4 May 2007 UBS announced that it would close the fund, redeem the money of external investors and reintegrate its finance, credit arbitrage and commercial real estate activities into the investment bank. The chief executive Peter Wuffli explained that the initiative had not met the bank’s expectations. The bank put the costs of reintegration at around USD 300 million.¹¹ Most of the positions that DRCM had accumulated returned to the investment bank precisely when the American mortgage market was turning. The Banking Commission concluded in 2008 that DRCM accounted for about 22 per cent of the total write-downs examined, that the venture had been a strategic error and that it had diverted the attention of senior management from other key issues during the period in which risks could still have been reduced.¹²

The departure of Costas and his team also weakened the investment bank itself. The Shareholder Report found that the creation of DRCM had led to a loss of senior fixed income risk management expertise in the investment bank, because experienced people moved to the new fund while the fixed income business was pursuing its growth plan.¹³ Two months after the closure of DRCM, on 6 July 2007, the board replaced Peter Wuffli as group chief executive with Marcel Rohner, who had led the wealth management and business banking division since 2004. Observers read the change as a shift of power from the investment bank in London and New York back to the wealth management business in Zurich, while Marcel Ospel remained chairman and was proposed for a further term.¹⁴

Notes

1. UBS AG, Form 6-K filed with the US Securities and Exchange Commission, press release of 10 December 2007 on measures to strengthen the capital base, https://www.sec.gov/Archives/edgar/data/1114446/000095012307016477/y44284e6vk.htm. ↩
2. UBS AG, Shareholder Report on UBS’s Write-Downs, 18 April 2008, section on the Investment Bank’s fixed income growth plan, copy at http://maths-fi.com/ubs-shareholder-report.pdf. The report was prepared by UBS and verified by KPMG. ↩
3. UBS AG, Shareholder Report on UBS’s Write-Downs, 18 April 2008 (as above), section on Treasury and the funding framework. ↩
4. Swiss National Bank, Financial Stability Report 2008, June 2008, https://www.snb.ch/public/asset/en/www-snb-ch/publications/financial-stability-report/2008/stabrep_2008/publications0_en/stabrep_2008.en.pdf. The report also records that the capital-to-assets ratio of the big banks had fallen steadily between 1995 and 2005 and stood at roughly 2.5 per cent in 2007. ↩
5. UBS AG, Shareholder Report on UBS’s Write-Downs, 18 April 2008 (as above), section on DRCM. The report records that the principal-finance, credit-arbitrage and commercial real estate businesses of the investment bank were transferred to DRCM together with around 120 staff. ↩
6. UBS, “Roots of UBS”, https://www.ubs.com/global/en/our-firm/our-history/roots-of-ubs.html, recording that Dillon Read & Co. was taken over by the Swiss Bank Corporation in 1997. See also chapter G.I. ↩
7. WealthBriefing, “UBS Shuts Down Dillon Read Capital Management”, May 2007, https://www.wealthbriefing.com/html/article.php/ubs-shuts-down-dillon-read-capital-management. ↩
8. UBS AG, Shareholder Report on UBS’s Write-Downs, 18 April 2008 (as above), sections on DRCM and on the funding framework. ↩
9. FINMA, Finanzmarktkrise und Finanzmarktaufsicht, report of 14 September 2009, section on the supervision of UBS before the crisis, https://www.finma.ch/de/~/media/finma/dokumente/dokumentencenter/myfinma/finma-publikationen/aufsichtsberichte/bericht01_finanzmarktkrise-und-finanzmarktaufsicht_endversion_d.pdf?la=de. ↩
10. UBS AG, Shareholder Report on UBS’s Write-Downs, 18 April 2008 (as above), chronology of DRCM. ↩
11. WealthBriefing (as above). ↩
12. Swiss Federal Banking Commission (SFBC/EBK), Subprime Crisis: SFBC Investigation into the Causes of the Write-downs of UBS AG, summary report of 30 September 2008, section on DRCM, https://www.finma.ch/finmaarchiv/ebk/e/publik/medienmit/20081016/ubs-subprime-bericht-ebk-e.pdf. A German version was published under the title “Subprime-Krise: Untersuchung der EBK zu den Ursachen der Wertberichtigungen der UBS AG”. ↩
13. UBS AG, Shareholder Report on UBS’s Write-Downs, 18 April 2008 (as above), findings on personnel and organisation. ↩
14. RTTNews, “UBS Replaces CEO Peter Wuffli With Marcel Rohner – Update 2”, 6 July 2007, https://www.rttnews.com/335447/ubs-replaces-ceo-peter-wuffli-with-marcel-rohner-update-2.aspx. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.