Monday, October 01, 2007

Market Mayhem To Follow

UBS AG, Europe's biggest bank, had an unexpected third-quarter loss and plans to cut 1,500 jobs after writing down the value of fixed-income securities by more than 4 billion Swiss francs ($3.4 billion).

The pretax loss, the first reported by any of the world's largest banks, totaled 600 million francs to 800 million francs, the Zurich-based company said today. Huw Jenkins, the head of the investment bank, will step down and become an adviser to Chief Executive Officer Marcel Rohner. Chief Financial Officer Clive Standish will retire. The shares fell.

UBS's announcement surprised analysts, who had estimated the company would earn as much as 3.3 billion francs, and contrasts with Credit Suisse Group, which said today it had a profit of about 1.3 billion francs in the quarter. A portion of UBS's writedowns are related to securities owned by Dillon Read Capital Management, the hedge fund unit that cost the company $300 million and former CEO Peter Wuffli his job.

``Rohner is cleaning the desk and in a very decisive way,'' said Dieter Buchholz, who helps oversee $107 billion at AIG Private Bank in Zurich, including UBS and Credit Suisse shares.

``This comes as a surprise, but it's positive that we know how big the fallout is.''

The planned job cuts account for about 7 percent of the staff at the investment bank.

UBS shares fell as much as 4.3 percent, and were down 65 centimes, or 1 percent, to 61.95 francs at 11:55 a.m. in Zurich, valuing the bank at 128.5 billion francs. The stock is down 16 percent this year, compared with the 9 percent decline at Credit Suisse, Switzerland's No. 2 bank, and the 13 percent tumble at Frankfurt-based Deutsche Bank AG, Germany's biggest bank.

More to Come?

Banking shares slumped on concern UBS's announcement may presage writedowns at competitors. Merrill Lynch & Co., the third-biggest U.S. securities firm, may record losses of as much as $4 billion on fixed-income assets, resulting in the lowest quarterly earnings in almost six years, Goldman Sachs Group Inc. analyst William Tanona said in a note to investors last week.

Merrill, Citigroup Inc. and JPMorgan Chase & Co. report third-quarter profit this month, after Morgan Stanley, Bear Stearns Cos. and Lehman Brothers Holdings Inc. said their earnings were hurt by the mortgage market.

UBS will report ``substantial losses'' in the fixed-income, rates and currencies division of its investment bank, mostly on securities backed by U.S. subprime residential mortgages, the bank said. The deterioration in that market in August ``was more sudden and more severe than in recent history,'' UBS said.

Rohner, 43, will take on the role of chairman and CEO of the investment bank, replacing Jenkins, 49. Marco Suter, 49, the executive vice chairman of UBS, will become CFO, replacing Standish, 54. Walter Stuerzinger, 52, the bank's chief risk officer, will become chief operating officer.

No Spinoff

UBS rejected calls to spin off its investment bank, saying it's ``more than ever'' committed to a strategy that combines asset management, private banking and investment banking. The investment bank should show a ``positive'' performance in the fourth quarter and help UBS post a profit in the final three months, Rohner said.

UBS still has $19 billion invested directly in subprime residential mortgage-backed securities, an amount it is ``quite comfortable owning,'' Rohner said, and some $4 billion in indirect investments. It has about $13 billion at risk in leveraged lending commitments, which have been written down ``appropriately,'' the bank said.

The company expects to report pretax profit of about 10 billion francs for the first nine months of the year. The bank's asset-management operations, the world's largest, are ``performing very well,'' UBS said in a statement.

Goldman, Morgan Stanley

U.S. competitors including Goldman Sachs Group Inc. and Morgan Stanley already reduced the value of some fixed-income holdings after investors shunned mortgage-backed securities and high-yielding corporate debt, driving down prices.

The fixed-income division at UBS has lagged behind rivals since 2005, when the bank moved 120 employees from the unit into the new Dillon Read hedge fund led by John Costas, who had been CEO of UBS's investment bank. While Dillon Read was profitable for outside investors, who had their $1.2 billion and gains returned to them, the bank's own $3.5 billion in invested capital lost value. In May, UBS said the fund would be shut and assumed all of its holdings.

Credit markets haven't recovered since then, with concern about defaults spreading from mortgage-backed securities to collateralized debt obligations and high-yield corporate debt used to finance leveraged buyouts.


UBS's revenue from fixed-income sales and trading dropped 31 percent in the second quarter and the bank, which will report full third-quarter results on Oct. 30, warned in August that ``turbulent conditions'' in the market might cause a ``very weak trading result'' in its investment bank for the rest of the year.

In August UBS replaced Simon Bunce, the head of fixed income, with Andre Esteves, who runs the Latin American unit.

Goldman, Morgan Stanley, Lehman and Bear Stearns last month reported earnings for their fiscal third quarter, which ended in August. While all but Goldman reported lower third-quarter profit, none reported a loss even after writing down the value of debt instruments.

Note: Of course, it is an open secret that investment banks make up their books any which way they choose. In light of this fact, kudos to UBS for being truthful, at least in part.


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