UBS should know a thing or two about writedowns
I am reminded of a sentence from the PJ O’Rourke book entitled Holidays In Hell. When referring to Gorbachev’s visit to the US in the late 1980s he comments that since ‘…the Soviet Union is heading for an economic fkup, it makes sense for their premier to spend time with some US Republicans - the people who wrote the book on fking up economies’.
Similarly, UBS, who have been forced to go cap in hand to both existing shareholders and outside investors to raise additional capital after their $19bn of writedowns last year (with more to come no doubt), obviously know a thing or two about large losses.
I’ve re-read the initial article and I think UBS were mistaken - apparently, they were labouring under the misunderstanding that “the worlds banks” included just UBS…!!!
They’ve just burned a 16% hole in that $120b estimate themselves in just one quarter…
that’s an awful lot of money. Their total is now $37bn, simply written off and they are going to post a first quarter net loss of $12bn
According to the BBC, they now have to raise $7 billion through an equity release… good luck with that
Actually, it looks like they need to raise another $15 billion. They’re also talking about paying a coupon of 7.5% on the convertible bond. That’s 19% dilutive to existing shareholders.
Still, it must be good news, because their share price is up 6% and they’ve only got $15 billion of subprime and $16 billion of alt-a on their books now.
Robert Preston had a show about the Super Rich on BBC tonight at 22:00. Most of it was standard stuff about easy credit, leveraging, traders being incentivised to take huge risks with other peoples money and essentially operating one-way bets.
But there were two particularly interesting points to me.
I always wondered what was the story behind the fact that the Ratings Agencies were rating the “structured finance” (to use his term) products consisting of sub-prime mortgages as AAA rated.
Well, first a guy from Standard and Poors stated (to paraphrase) “No, we didn’t go out and check with the mortgage recipients whether they were actually in a position to repay. We relied on the information provided to us from the banks”.
Then someone else went on to explain that the rating agencies used historical data to rate the products and didn’t update them as the situation on the ground changed.
The rating was based on the historical level of default, when the sub-prime business was small, and only the “cream” of sub-prime applicants were receiving mortgages
In 2001, only 1 in 13 mortgages were sub prime. By 2006 this had jumped to 1 in 4. Similarly the rate of default on first repayment (after 6 months - do they get a holiday first?) rose within a space of months from about 1.5% to 6%
None of these changes were captured by the rating agencies in applying their AAA rating to the products
Also it was stated that traditionally people defaulted on all other loans (credit card, car loan etc) but tried to keep up their mortgage payments. However for the first time, in this crises, they are seeing people who are willing to default on their mortgage but not on their credit card loan.
Though I still think the banks were lazy and/or stupid to think that these sub-prime-loan-based products could possibly be AAA - irespective of what the rating agencies were stating. The people involved must have had an idea of what was going on (as must Greenspan and the like).
So no surprise that the banks are facing such write-offs now.
Tell it to the auditors!!!
The truth of the matter would seem to be the banks saw a way of shifting more product and removing all risk by securitising the mortgages (zero risk then lend to all) and if the halfwits buying this paper were too stupid to check what they were buying then they should be done for negligence and the banks done for miss-selling in terms of the AAA rating which they would know to be wrong because of the increase in sub prime business being done.
It is just another “pull the wool over the eyes of Joe Citizen”. All the participants above insisted that national regulators should have nothing to do with what was happening. The way that the same people insist that religion not impinge on anything they do; they only demanded the same extension from religious teaching as citizens of the State. So, will they take the medicine? Two chances! These people don’t have any shame, they’ll come running with their tale between their legs – to whom- You and Me! And then when they are rescued, they will hive on extra interest; and if interest rates drop, they will pile on the fees! Welcome my Irish friends to the real world of atheistic capitalism. The one fault that we Irish have, is that we came late to the game. No doubt, we will be good honest chappies and pay up. Reincarnation life is always an impriovement
What annoyed me was that it wasn’t stated that the default rate for the late nineties/early noughties was particularly low by historical standards. They only went back a few years (I believe it was 5) from when they first started packaging up this stuff. If they’d gone back a bit earlier or looked at the current deviation from mean they would have twigged that the default projections were way too low. Of course, that supposes they wanted to do anything other than accept money for old rope - you, mr. banker, do all the packaging, provide the model, provide the historical data, I’ll roll on my back while you stuff my hole with fivers and vomit the AAA rating you’re so keen to get so you can sell this rubbish to pension funds.
What I want to know is why none of the pension funds that have invested in this have written it down. It has been all banks so far. If you have a fund with a proportion in “property” be afraid, be very afraid.
We got to see these organisations as they are. When making money there is no incentive to ask the awkard question. You are not going to get promoted or get a bonus. The bonus and promotion is for bigger profits in your unit or division.
Auditors & regulators more or less get paid based on client profits - the bigger the clients profits the bigger the audit / regulation fee.
Now all bank will not lend to each other - because they all knew the whole thing was toxic.
Who called it - The Economist had it right among others.