August 12, 2008 – 11:28 am

UBS reported its first quarter losses and write-downs at $23B and $38B, initiated a carnival-like cover up and then proceeded to tell its second quarter melt down. Stoked by losses of $331M, $5.1B in write-downs, the fleeing of wealthy clients and the forced buyback of billions in bad bonds, the bank’s colossal pain keeps ratcheting upward.

UBS AG, one of the hardest hit banks in the subprime mortgage crisis, said Tuesday that it lost 358 Swiss francs ($331 million) in the second quarter as it took another $5.1 billion hit in write-downs on bad assets.

Before the news of a debt securities buyback, the UBS was expected to post a second quarter loss of $260M, according to a poll conducted by Reuters. Instead, the bank provisioned $900M to buy back Auction Rate Securities that have evaporated in the credit crunch. And at the worst possible time, the key wealth management division is seeing a full scale retreat of assets.

The bank said it had net new money outflows during the quarter of CHF43.8B ($40.5B), compared with inflows of CHF34B in the second quarter of last year. This shows that some customers were pulling out funds and looking elsewhere, a bad sign for a bank that heavily relies on wealthy investors.

UBS did manage to put up some fight during the second quarter by raising cash, cutting nearly 2,400 jobs and pushing operating expenses down 18 percent. But the capital raising heyday has had its day, and people and expenses can only be cut so much. The majority of the shake up is a song and dance to give UBS the appearance of decisiveness.

So, already tearing apart, management rips out its very core: the Universal Bank Model. But the Universal Model is nothing more than this quarter’s patsy. Just like the first quarter internal report, it is a convient place to lay the blame so as to see no evil. More than shortcomings of the model, though, it was UBS’s failure to put sufficient risk controls in place that did the damage. 

Before the credit crunch, UBS was the biggest bank in the world by assets. Now it’s taken first place in credit related write-downs ($45B and counting) while moving to 25th in line for asset value. Nothing is different this quarter from the last or the next.

UBS’s furture was set in stone when the company lost all restraint and management turned a blind eye as long as profits came thundering in. In the midst of the aftermath, UBS is crashing down and proving that old adage: “The bigger they are, they harder they fall.”


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