Costas, Hutchins Said to Reunite For Firm After Dillion Reed Failure

[Joanne98]

Feb. 25 (Bloomberg) -- John Costas and Michael Hutchins, are reuniting to start a financial-services firm after running UBS AG’s hedge fund Dillon Read Capital Management LLC, according to people familiar with their plans.

Costas, 52, took over UBS’s investment bank in 2001 and separated the proprietary trading desk to form Dillon Read in 2005. Zurich-based UBS shut down the unit in May 2007 and said it accounted for $3 billion of the $19 billion in losses the bank reported that year. Hutchins, 53, was president of Dillon Read and previously headed the debt unit of UBS.

Costas, Hutchins and Matthew Johnson, who was also a trader at Dillon Read, plan to open a so-called boutique firm that will have a broker-dealer and also make bets with its own capital, according to three people who declined to be identified because their plans are private. The preliminary name for the firm, which may be changed, is VinsonForbes, two of the people said.

“There are cases where people who failed can suddenly make a go of it,” said Richard Sylla, an economic and financial historian at New York University’s Leonard N. Stern School of Business in New York. “In the U.S., you can get your second or third chance. In business school, we say that’s one of the virtues of this country.”

Calls to Hutchins and Johnson in New York weren’t immediately returned. Costas, a former head of fixed income and derivatives for Credit Suisse Group, declined to comment.

Proprietary Trading

When Hutchins ran fixed income for UBS, revenue in that part of the business grew to $7.3 billion in 2004 from $2.8 billion in 2000. Proprietary trading profit in that area was about $700 million in 2005. Marcel Ospel, the former chairman of UBS, and Peter Wuffli, chief executive until July 2007, created Dillon Read Capital Management to enable UBS’ wealth management clients to invest in the fund.

Using UBS’ balance sheet and investing in corporate debt, Treasuries and mortgage securities, Dillon Read earned $720 million in profit in 2006, according to people familiar with the profits at the time. In November 2006, Costas launched Dillon Read Financial Products, a $1.3 billion hedge fund.

In mid-March 2007, Dillon Read informed UBS management, including Walter Stuerzinger, UBS chief risk officer, they had to take $50 million in markdowns on securities backed by subprime mortgages. After the losses grew to 150 million Swiss francs ($130 million), UBS said on May 3 of that year it would shut down Dillon Read. The losses increased to $3 billion in 2007 after UBS took over the positions, according to the company.

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