February 13, 2009 – 10:16 pm
The once-mighty and monolithic UBS got knocked closer to mortal man today when the bank reported a $7B loss for fiscal fourth quarter 2008 and a $17B full year bomb. These are the biggest losses ever taken by a Swiss group.
Always disdainful of disclosure and constantly embroiled in crimes and cover ups
, the autocratic bank’s infamous and audacious accounting practices still cannot hide more than $50B written down since the credit bubble burst in July 2007.
UBS is a mere vestige of its former self, but it is still able to prove that old traditions die hard. In its typical fashion, the bank provided only sketchy and twisted details of the losses and would prefer you believe it had absolutely no write-downs this past quarter. The bank makes only scant references to write-downs, blaming the losses on trading, impairments to leveraged buy-out loans, write-downs to mono-liner exposure, and a write-down to Lyondell Chemcial Co. Lyondell is particularly interesting because UBS and Goldman Sachs both helped underwrite Lyondell’s $21B takeover by Basell of Rotterdam. But even the Golden Godfather was more forthcoming
than UBS with respect to losses relating to Lyondell. Witness:
The writedowns would add to at least $3.7 billion of losses related to Lyondell already acknowledged by Goldman Sachs Group Inc., Citigroup Inc. and Royal Bank of Scotland Group Plc. While Zurich-based UBS didn’t offer details, Chief Financial Officer John Cryan said on the call that the charges were “largely related to our exposure to LyondellBasell.”
More shifty accounting cost the bank an additional $3.2B.
Chief Financial Officer John Cryan told analysts the group also avoided a $3.2 billion additional hit to its operating profit by moving around $15.8 billion of risky assets to its banking book from its trading book. The switch means the bank will hold the assets “for the foreseeable future” and therefore doesn’t need to record a trading loss as their value falls.
If you crash your car and it’s a total loss, your net worth drops instantly. Somehow UBS can keep the original pre-crash price of the car on it’s books until the car’s value recovers. This kind of funny accounting won’t pay the bills, but by keeping $15.8B on the balance sheet, you can flip double or nothing for $3.2B.
Here’s how it works: UBS transfers the $15.8B loss to the banking book, where it sits as $15.8B, but they can’t get $0.15 for it and they know it will never recover. So it hangs out there before continuing on to become a write-down, which by definition is a level 3 asset.
UBS was interrupted by insiders’ greed. They made the deals that generated the fees and drove the bonuses, leaving the bank holding the bag long after they had fled or been fired. UBS reached down into its well-connected dirty pockets and pulled up a monster-sized bail out. The original deal made in October was supposed to transfer $60B of radioactive waste from UBS’ balance sheet to the Swiss central bank, but UBS eventually transferred
a mere $40B.
It has since transferred $40 billion in toxic assets to a fund run by the Swiss National Bank and received a SwFr6 billion injection of fresh equity from the Swiss Government in return for a 9.3 per cent stake.
UBS in turn was required to raise $6B, which was achieved by issuing convertible notes
. The hit to UBS, more akin to a love tap, was a CHF4.2B ($3.62B) charge and a credit expense of CHF1.6B ($1.38B). From the fourth quarter
UBS reached an agreement with the Swiss National Bank (SNB) in October. This allows UBS to transfer a large quantity of illiquid and other positions to a fund owned and controlled by the SNB. In a related transaction, UBS placed mandatory convertible notes with the Swiss Confederation in order to raise new capital. These two transactions impacted fourth quarter 2008 results by a net charge of CHF 4.2 billion. We recorded an own credit expense of CHF 1.6 billion, mainly due to redemptions of UBS debt during the quarter.
But for all the bail out and cover up, eventually something just had to give. Profit and prestige evaporated when the credit bubble burst and investors, especially the wealthy ones, made a run on the bank.
Profit was down around 40% at the wealth management business, which looks after the group’s rich clients, as the bank reported further outflows of cash. Clients withdrew a total of 85.8 billion francs from the group in the fourth quarter, including 58.2 billion francs from the wealth management business and business banking operation and 27.6 billion francs from the asset management side of the business.
The outflows slowed toward the end of the quarter and turned into net inflows in January as confidence improved. The group also hired around 400 financial advisers in the U.S. in the fourth quarter to boost the region.
The outflows may have begun to trickle back, but investors’ trust and nor competitors’ respect certainly has not. The bubble has burst and the loot’s been stolen. Despite all the carnage so far, the credit crisis has really just begun, so now the bank’s actions are making disclosures that no balance sheet can hide.
After announcing 9000 job cuts
, UBS said it will slash another 2000 jobs and increase the pay of the remaining investment bankers. It’s a nice trickle up methodology, but in the prelude to the depression, investment banking is not where the profits will be made. Obviously, though, it does seem that it’s where UBS will go.
“The hard work in terms of headcount reduction will now be behind us. 15,000 is the right staffing level for our new investment bank.”
The hard work is just beginning if you’re one of those let go. Like a former champion who hung on too long, UBS staggers in the middle of the ring awaiting the knockout blow.