UBS, the investment bank, spelt out in painful detail yesterday the failures that contributed to its $37.4 billion (£18.8 billion) of sub-prime writedowns. The failures included a rushed set-up of its hedge fund business, an over- aggressive growth plan and lack of risk management in investment banking.

Switzerland's largest bank issued a report for shareholders outlining the findings of an inquiry conducted at the request of the Swiss Federal Banking Commission, the regulator.

UBS is the European bank worst hit by the credit crunch, with $18.4 billion in writedowns for 2007 and $19 billion in this year's first quarter. The debacle has cost Peter Wuffli his job as chief executive, and Marcel Ospel, the chairman, is to stand down at what is tipped to be a fiery annual meeting tomorrow.

UBS has yet to tell the commission how it is to fix its problems. Shareholders vote tomorrow on whether to back a SwFr15 billion (£7.4 billion) rights issue. They will also vote on Mr Ospel's replacement, Peter Kurer, the bank's general counsel.

Actares, the shareholder group, said that it would be “irresponsible” to reject Mr Kurer because of the uncertainty it would create, but urged him to reform UBS's corporate structure, business model, culture and remuneration.

According to yesterday's report, many of UBS's US sub-prime-related problems arose from establishment of Dillon Read Capital Management (DRCM), the bank's hedge fund business, in 2005.

Difficulties created by DRCM were exacerbated by cheap funding and an ambitious five-year growth strategy that emphasised the importance of making profits on fixed-income investments. At the same time, UBS paid bankers under a bonus scheme that encouraged them to focus on short-term profits, the report said.

Despite the errors, the Government of Singapore Investment Corporation (GIC), which in December promised UBS a SwFr11billion capital injection, yesterday reiterated its faith in the bank's long-term prospects. Tony Tan, deputy chairman of the GIC, said that the investment would bring “good returns when markets stabilise”.

The report looked at UBS's activities up to December 31. About 16 per cent of its sub-prime losses were attributed to DRCM, with the bank's collateralised debt obligation (CDO) operations contributing 66per cent and foreign exchange and other trading 10 per cent. The rest of its losses came from other of the bank's fixed-income operations.

UBS admitted in the report that DRCM was set up to prevent a few key bankers leaving. This is thought to refer to John Costas, then head of UBS's investment bank, and Mike Hutchins, its global fixed-income head, an expert in creating securities from unattractive assets.

At the time, investors were pouring cash into hedge funds - which the risk-averse UBS had avoided since its losses on Long Term Capital Management in 1998 - and both men were keen to capitalise on the boom.

Desperate to keep Mr Costas, Mr Wuffli agreed to set up DRCM and let it invest cash from the investment bank. Mr Wuffli “did not correctly weigh the strength of UBS as an organisation against the perceived importance, interests and demands of a few individuals, and allowed exceptional levels of authority”, the report said.

Picking the rest of DRCM's top team was rushed, and the “business case and internal agreements and arrangements for the DRCM transaction were ... concluded with less opportunity for wider internal review than might otherwise have been the case”. About 120 of UBS's staff joined DRCM, including its best fixed-income managers and some experienced risk managers.

UBS had to replace them with bankers who had specialised in sales but not trading, the report said. Huw Jenkins, previously head of the investment bank's market-leading equities business, replaced Mr Costas as chief executive, while Simon Bunce, head of UBS Securities in Japan, took Mr Hutchins's role. “A senior risk manager in fixed income was not hired,” the report notes.

UBS was pursuing a five-year plan demanding expansion in businesses such as DRCM. Although there was no group decision to increase risk, “there was a focus on the growth of certain businesses that did, as part of their activities, invest in or increase UBS's exposure to the US sub-prime sector”, the report said.

Under pressure from its growth plan for quick results, the bank moved farther into CDOs, failing to limit the risky assets held at any one time. CDOs went on to become the biggest losers in the credit crunch.

UBS's errors were exacerbated by access to cheap funding, and its bonus scheme failed to distinguish between returns made by skill and those arising from low-cost finance, the report said.

The key figures

The crown of John Costas, 51, the former golden boy of UBS, John Costashad his crown became tarnished last year when Dillon Read Capital Management (DRCM), the UBS-backed hedge fund that he ran, collapsed less than two years after he had set it up. DRCM was hit by trading losses of SwFr150 million (£62 million) linked to the troubled mortgage market. It was Mr Costas’s decision to develop the strategy of investing in mortgage-backed securities which that went so disastrously wrong at UBS.

Huw Jenkins, 49, left his job as chief executive of UBS’s investment bank in October. He is still serving as a senior adviser to Marcel Rohner, the chief executive. He rose to head the investment bank’s market-leading equities business before replacing Mr Costas as chief executive of UBS’s investment bank when he left for DRCM. Before the UBS-SBC merger, Mr Jenkins worked for SBC in the Asian Equities Division. The Welsh-born Liverpool University graduate joined BZW (Barclays de Zoete Wedd) in 1991.

Peter Wuffli, 50, won a boardroom battle for control of UBS with Luqman Arnold, then chief executive, in 2001. He served as chief executive until his departure last July. The former economiics journalist started his business career as a management consultant with McKinsey & Co in 1984. He left for SBC in 1994. When SBC merged with UBS in 1998, Mr Wuffli became UBS group chief financial officer, then chairman and chief executive of UBS Asset Management.

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