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Is It Safe? UBS Goes to Risk Rehab

Swiss bank UBS is struggling to recover after losing billions on bad debt bets.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Switzerland's banks use to be viewed like its watches: precise, meticulous and elegant. But in recent years, its

biggest bank




, can't get out of its own way.


investment banking unit

bet heavily on credit securities and lost big. The company's stock has fallen 78% in the past two years, topping the 51% decline for Swiss rival

Credit Suisse


. UBS isn't far behind the epic 92% drop at



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With three chief executives in as many years -- each looking more like a James Bond villain than the previous -- and its curious attempts to act like its less-refined American competitors, UBS strayed far from its Swiss roots. Even the bread and butter of the Swiss banking industry, private wealth management, has come back to bite UBS.

Last year, the U.S. Justice Department accused the firm of helping Americans

avoid taxes

. Switzerland has long been a haven for rich foreigners looking to shield assets from taxes. In February, UBS agreed to pay $780 million in fines and offered the names of some clients.

As soon as customers heard about the U.S. investigation, they started pulling money. Clients, some fearing possible incrimination, withdrew $58 billion in the fourth quarter.

While these shady dealings are a black eye for the bank, they're less serious than the massive hit the bank has taken in the past two years from the investment bank's bad bet on credit assets. UBS invested heavily in CDOs (collateralized debt obligations), CMOs (collateralized mortgage obligations), CDSs (credit default swaps), and almost every other acronym that crashed in the past two years.

As the U.S. real estate market crumbled, losses on these trades more than doubled to 26.9 billion Swiss francs last year from 10.7 billion Swiss francs in 2007. In 2006, the company made 13.4 billion Swiss francs from trading. The company plans to cut 8,700 workers in the aftermath of its dismal performance.

UBS hired former Credit Suisse CEO Oswald Gruebel earlier this year to fix the struggling bank. More importantly, the bank has halted investment banking activities that involve real estate, CDOs, arbitrage and some forms of commodities. That's the right decision: Swiss banks excel in money management.

UBS could have avoided many of these problems had it learned anything from the Long-Term Capital Management fiasco in the mid 90s. In that situation, a hedge fund that relied on arbitrage strategies and heavy borrowing imploded, forcing the

Federal Reserve

to intervene. Exotic assets and risky spread plays are best left to hedge funds rather than institutions like UBS, which are supposed to be safe and stable institutions. Ratings has rated UBS a "sell" with a grade of D. It's too soon to consider UBS safe, but the course it's mapping is more appealing than those of any American bank. After it cleans up its mess, UBS should keep on ticking. Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research,

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Prior to joining Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.