UBS Blames Dillon Read For Subprime Losses

Apr 22 2008 | 9:13am ET

UBS yesterday laid much of the blame for its catastrophic subprime losses on its now-defunct hedge fund unit, Dillon Read Capital Management.

Although Dillon Read accounted for just 16% of the bank’s subprime-linked losses last year, UBS said the hedge fund’s establishment and liquidation was “highly distractive” and an internal brain drain. The bank also blamed the “exceptional levels of autonomy” given to Dillon Read leadership—read: former Dillon Read CEO John Costas—for the disaster.

“The manner in which Dillon Read was established did not correctly weight the strength of UBS as an organization against the perceived importance, interests and demands of a few individuals, and allowed exceptional levels of autonomy within a complex and non-standard governance model,” UBS said in a report, released yesterday, that was requested by Swiss regulators.

The establishment of Dillon Read—which was around for just 11 months—was widely seen as a way for UBS to keep talent that might be tempted to leave for the hedge fund industry, most notably Costas, who had served as UBS’ investment banking chief, in-house. In addition to Costas, the investment banking group lost several of its top fixed-income bankers to Dillon Read.

The bank’s own leadership came in for criticism, as well, over the hasty establishment of Dillon Read.

“Whilst work on the creation of Dillon Read progressed for some time, decisions on the composition of the senior management team were made relatively late in the process,” UBS said. “In consequence, the business case and internal agreements, and arrangements to close the Dillon Read transaction were eventually effected with considerable speed and concluded with less opportunity for wider internal review than might otherwise have been the case.”


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