Dear UBS shareholder,

We Swiss are thorough. Our 2007 annual report stretches to a mammoth 464 pages in four separate documents. After translating from German, the text can be a bit hard going. Wrestling with fondue would be easier. In the interests of brevity, therefore, I have summarised the main points below.

1. In a matter of months we have managed to turn our investment banking arm, built out of the old SG Warburg, once the greatest merchant bank in Europe, into the laughing stock of the securities industry. Losses from mortgage-backed securities by our in-house traders have reached $18 billion and led to our first full-year loss, and there could be more pain to come. Our lawyers won’t let us apologise in print in case that brings a volley of lawsuits, but we really are terribly regretful.

2. We know what went wrong. The UBS name and balance sheet was so strong that we were able to borrow laughably cheaply in the benign markets prevailing before last summer. That meant all kinds of leveraged bets looked attractive. Our biggest competitors seemed to be making lots of money in US mortgage-backed securities, so we piled in, too. It worked so well initially that we doubled up, creating an in-house hedge fund to take even bigger bets. Our stress-testing was inadequate: we failed to make pessimistic enough assumptions about what could go wrong.

3. We’ve put in place reforms to prevent anything similar happening again. Trading activities will be financed at rates prevailing in the wider market, rather than at the cheapo rates achievable by UBS. We’re going back to the basics of looking after clients and partly pulling out of proprietary trading. Our risk-management experts have been given a kick up the backside and told to imagine a wider range of outcomes when stress-testing particular investment positions. And we have strengthened our balance sheet, courtesy of a capital injection from the Singaporeans and an anonymous friend from the Middle East.

4. Even at 464 pages, there, er, wasn’t room to apportion individual blame for this fiasco. Both I and my new chief executive, Marcel Rohner, have forgone any bonus and my total pay is down 90 per cent to $2.6 million. By contrast, three ousted executives have walked away with $90 million. Rewards for failure? I couldn’t possibly comment. Yours sincerely,

Marcel Ospel, Chairman.

patrick.hosking@thetimes.co.uk

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