April 1, 2008 – 7:41 pm


Say you have warehouse full of toxic Alt-A bio hazard stored on your balance sheet you need to dispose of so no one notices (mono-liners). If the Alt-A waste is temporarily worth 96c on the dollar you have yourself a 4c write down you are happy to take, but not to advertise. So you call in the bio-hazard removal team at Pimco and they back their trucks up to the loading dock of your balance sheet and whisk away the waste under the cover of night. That is, they bought it all from you, but for 70c on the dollar. That’s a 30c loss or write down-unreported and that is what UBS might be trying to get away with:

Specifically, $20bn of Alt-A mortgage securities to be sold to bond giant PIMCO.

Such is the talk going around London dealing rooms anyway.

The Alt-A MBS have reportedly been sold at 70c on the dollar, which would be a massive loss, since UBS valued what looks to be the same instruments at 96c on the $1 just three weeks ago in their 2007 results:

Is there any truth to the rumor? Well

The first glimpse at how UBS fared in the first quarter suggests that something did indeed happen within its Alt-A book. Subprime-related positions were reduced from $27.6bn to $15bn, a cut of about 55 per cent which could easily have come through straight writedowns. But Alt-A fell from $26.6bn to just $16bn, a 40 per cent drop. As the statement says:

These developments are the result of asset disposals as well as the effects of further writedowns.

With $19bn in total writedowns, it’s fair to say the bulk of the reduction came from the latter rather than the former. Assuming that the subprime writedown totalled close to the full $12.6bn, that leaves another $6.4bn to play with. How much of that could conceivably have hit Alt-A? We haven’t seen more than token efforts to write down banks’ Alt-A portfolios thus far.

and this

UBS in its fourth quarter statement (pages 19 to 21 for the gruesome details) has revealed a hitherto unknown $26.6bn in exposure to Alt-A mortgages, and taken a $2bn hit on them. Alt-A didn’t feature in their third quarter report whatsoever.Within that the bulk of UBS’s exposure looks relatively resilient – $0.8bn in losses on the higher rated, first lien exposure, now $21.2bn. The riskier stuff, totalling $5.4bn at the end of the year, took losses of $1.2bn. Given the wholesale meltdown in US housing though, this may cause investors further discomfort.

And here is some fuel for discomfort: what is Pimco going to do with all that hazardous waste? SELL IT! To anyone, before it is discovered what all those slimy things really are. The Ponzi scam keeps going ’round and ’round.

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