QUOTE
UBS to write down $10 bn in subprime assets
Swiss bank UBS, which has been severely battered by the US subprime mortgage crisis, has announced a fresh writedown of USD 10 billion. Reversing its earlier guidance, UBS said it is expecting a loss in the fourth quarter, and may even show a loss for 2007 as a whole.
The bank also said it has obtained a huge injection of fresh capital from Singapore Investment Corporation and an unnamed Middle East investor.
UBS said it would place around USD 9.7 billion worth of its USD 11.48 billion convertible bond issue with the Middle-East investor.
David Buik, Partner, BGC Partners said that this highlights that markets haven’t seen the worst of the subprime lending situation just yet.
According to him, the credit crisis being experienced now throughout the world is going to pinch much harder than perhaps most people believed it would have done initially. Buik fears that banks are going to have to see greater provisions for bad debt announced in January than perhaps they had originally thought.
Excerpts of CNBC-TV18’s exclusive interview with David Buik:
Q: How has this news gone down, especially with the fact that UBS is now said that it is going to look to raise about USD 11 billion via stake sale. Coming on the back of what Citibank announced not too long ago, is this actually going down well with people or is there more pain left in the system?
A: The initial reaction has been one of disappointments that such a large sum of money is having to be written off against subprime and mortgage backed securities of USD 10 billion. But looking at the prospects going forward, the Chairman Marcel Ospel and also the Chief Executive, Marcel Rohner, who are new in their roles, are absolutely determined to get all the skeletons out of the cupboard and get the sheet wiped complete clean to move forward. That also necessitates, as you so rightly pointed out, raising USD 11 billion worth of fresh capital, much of this will be coming obviously from Singapore, from GIC who will be taking something like a 9% stake. So all in all, it is an encouraging sign going forward.
Of course, what it does do, is it does highlight the fact that we haven’t seen the worst of this subprime lending situation come out. In two weeks time, when the US investment banks post their next quarters figures, one worries about the size of perhaps some of the provisions for bad debt which may have to be raised from their current levels. Obviously, the banking fraternity in London has seen losses somewhere between 1-2.5%. The initial reaction to UBS’s share price wasn’t as bad as a lot of people thought it would be.
Some thought it would be down 5%. It has fallen from 78 Swiss francs in February of this year and closed to 57.2 Swiss francs on Friday. It’s only actually lost 1.5 Swiss francs today about 2.6%. But we always felt that at the lower levels, once the share price drifted down, there would be plenty of bottom fishers there more than happy to accommodate them. This is considering that a lot of people think that now that we have got all the skeletons out of the cupboard, going forward looks more attractive than perhaps it did a couple of weeks ago.
Q: What does all this mean for interest rates? The Bank of England but for the first time in two years and we have seen both those currencies that you mentioned, the Swiss franc and the Pound, react sharply to the dollar as well over the past couple of weeks. How does this leave the macros in the currency picture from here?
A: The currency picture at the moment is that, though we did cut interest rates in UK last week by 0.25% and though inflation is still a threat, to get the sentiment changed towards banks is probably not enough, we needed really a 0.50%. There is still a huge discrepancy between official wholesale deposit rates, something like 90-bps above the official rate of interest rate. Why is that happening? Because there is no confidence amongst the banks in the UK, in fact amongst the banks in the world, to lend each other money beyond very short-term rates.
Of course, the higher cost of money gets past on to industry and commerce and the outlook for that is not particularly encouraging for the next two or three months. Sterling at the moment will probably ease off but only when we know that another cut is almost evitable, probably in February or March of next year. Who knows, it might even have to come off another 1%.
This credit crisis that we are now experiencing throughout the world is going to pinch much harder than perhaps most people believed it would have done initially.
Q: What is your sense at this point in time of the kind of numbers that are doing the rounds on the write-downs that other investment banks could make in this quarter, the likes of Merrill Lynch, Morgan Stanley and even Lehman Brothers?
A: I think it is pure speculation and I don't think somebody like me coming up with some ‘pie in the sky’ numbers, when I don't really know the exact content of their portfolios, it is probably just troublesome for everybody. But to try and answer the question positively with you, I do fear that we are going to have to see greater provisions for bad debt announced in January than perhaps we had originally thought.
If you recall going back, the first people to announce provisions for bad debt were I believe Bear Stearns, Merrill Lynch and Lehman Brothers. Lehman Brothers and Bear Stearns initially were quite small. I think the fact remains is, it’s not them being duplicitous in anyway, I think events have overtaken this. Secondly, it has been possible to actually quantify the losses by knowing what the valuations of some of these, very poorly rated, securities are. Some of them frankly, probably have for the time-being, no value at all. So, until such time that is quantified, I think banks will be in a quandrum.
It does remain possible that if many of them have had their time over and again, they’ll probably wish that they'd overstated their losses initially rather than having to return to the scene of the crime and saying I'm awfully sorry, we told you it was USD 6 billion last time, this time it’s USD 10 billion. I know that that was done in good faith, but the fact remains that it probably should have been overstated at the first time of asking.
Swiss bank UBS, which has been severely battered by the US subprime mortgage crisis, has announced a fresh writedown of USD 10 billion. Reversing its earlier guidance, UBS said it is expecting a loss in the fourth quarter, and may even show a loss for 2007 as a whole.
The bank also said it has obtained a huge injection of fresh capital from Singapore Investment Corporation and an unnamed Middle East investor.
UBS said it would place around USD 9.7 billion worth of its USD 11.48 billion convertible bond issue with the Middle-East investor.
David Buik, Partner, BGC Partners said that this highlights that markets haven’t seen the worst of the subprime lending situation just yet.
According to him, the credit crisis being experienced now throughout the world is going to pinch much harder than perhaps most people believed it would have done initially. Buik fears that banks are going to have to see greater provisions for bad debt announced in January than perhaps they had originally thought.
Excerpts of CNBC-TV18’s exclusive interview with David Buik:
Q: How has this news gone down, especially with the fact that UBS is now said that it is going to look to raise about USD 11 billion via stake sale. Coming on the back of what Citibank announced not too long ago, is this actually going down well with people or is there more pain left in the system?
A: The initial reaction has been one of disappointments that such a large sum of money is having to be written off against subprime and mortgage backed securities of USD 10 billion. But looking at the prospects going forward, the Chairman Marcel Ospel and also the Chief Executive, Marcel Rohner, who are new in their roles, are absolutely determined to get all the skeletons out of the cupboard and get the sheet wiped complete clean to move forward. That also necessitates, as you so rightly pointed out, raising USD 11 billion worth of fresh capital, much of this will be coming obviously from Singapore, from GIC who will be taking something like a 9% stake. So all in all, it is an encouraging sign going forward.
Of course, what it does do, is it does highlight the fact that we haven’t seen the worst of this subprime lending situation come out. In two weeks time, when the US investment banks post their next quarters figures, one worries about the size of perhaps some of the provisions for bad debt which may have to be raised from their current levels. Obviously, the banking fraternity in London has seen losses somewhere between 1-2.5%. The initial reaction to UBS’s share price wasn’t as bad as a lot of people thought it would be.
Some thought it would be down 5%. It has fallen from 78 Swiss francs in February of this year and closed to 57.2 Swiss francs on Friday. It’s only actually lost 1.5 Swiss francs today about 2.6%. But we always felt that at the lower levels, once the share price drifted down, there would be plenty of bottom fishers there more than happy to accommodate them. This is considering that a lot of people think that now that we have got all the skeletons out of the cupboard, going forward looks more attractive than perhaps it did a couple of weeks ago.
Q: What does all this mean for interest rates? The Bank of England but for the first time in two years and we have seen both those currencies that you mentioned, the Swiss franc and the Pound, react sharply to the dollar as well over the past couple of weeks. How does this leave the macros in the currency picture from here?
A: The currency picture at the moment is that, though we did cut interest rates in UK last week by 0.25% and though inflation is still a threat, to get the sentiment changed towards banks is probably not enough, we needed really a 0.50%. There is still a huge discrepancy between official wholesale deposit rates, something like 90-bps above the official rate of interest rate. Why is that happening? Because there is no confidence amongst the banks in the UK, in fact amongst the banks in the world, to lend each other money beyond very short-term rates.
Of course, the higher cost of money gets past on to industry and commerce and the outlook for that is not particularly encouraging for the next two or three months. Sterling at the moment will probably ease off but only when we know that another cut is almost evitable, probably in February or March of next year. Who knows, it might even have to come off another 1%.
This credit crisis that we are now experiencing throughout the world is going to pinch much harder than perhaps most people believed it would have done initially.
Q: What is your sense at this point in time of the kind of numbers that are doing the rounds on the write-downs that other investment banks could make in this quarter, the likes of Merrill Lynch, Morgan Stanley and even Lehman Brothers?
A: I think it is pure speculation and I don't think somebody like me coming up with some ‘pie in the sky’ numbers, when I don't really know the exact content of their portfolios, it is probably just troublesome for everybody. But to try and answer the question positively with you, I do fear that we are going to have to see greater provisions for bad debt announced in January than perhaps we had originally thought.
If you recall going back, the first people to announce provisions for bad debt were I believe Bear Stearns, Merrill Lynch and Lehman Brothers. Lehman Brothers and Bear Stearns initially were quite small. I think the fact remains is, it’s not them being duplicitous in anyway, I think events have overtaken this. Secondly, it has been possible to actually quantify the losses by knowing what the valuations of some of these, very poorly rated, securities are. Some of them frankly, probably have for the time-being, no value at all. So, until such time that is quantified, I think banks will be in a quandrum.
It does remain possible that if many of them have had their time over and again, they’ll probably wish that they'd overstated their losses initially rather than having to return to the scene of the crime and saying I'm awfully sorry, we told you it was USD 6 billion last time, this time it’s USD 10 billion. I know that that was done in good faith, but the fact remains that it probably should have been overstated at the first time of asking.
