UBS, one of the world’s largest investment banks, wrecked its reputation as a bastion of financial stability after it admitted this week that losses stemming from the United States sub-prime mortgage crisis had spiralled by £10-billion in the first three months of the year to a total of almost £19-billion.
The enormous size of the write-downs, which were larger than any of its US rivals, underlined the gamble taken by the Swiss bank on complex mortgage-backed securities that have become almost worthless since the onset of the credit crunch.
Switzerland’s financial watchdog, unnerved by the scale of the losses, said it would rewrite its rule book to prevent further reckless lending and re-establish Zurich’s reputation for stability. Ratings agency Standard & Poor’s said it had cut the Swiss bank’s credit status and would keep a watchful eye on its progress.
Stock markets reacted positively to the news in the expectation that the bank had drawn a line under its exposure to sub-prime mortgages. The bank’s share price rose sharply, trading up 7% at £15,50 on the Zurich exchange. Investors also pointed to Deutsche Bank’s £2-billion write-down later in the day, which several argued showed banks were taking steps to clear out their bad debts.
However, workers at the bank were braced for bad news after UBS pencilled in further redundancies.
Chairperson Marcel Ospel was forced to step down after months spent resisting pressure from disgruntled investors. He said the bank was considering where to scale back, but was unlikely to make any announcements for another few weeks.
He said trading in sub-prime mortgage derivatives had begun to pick up in recent days. Chief executive Marcel Rohner said UBS wanted to avoid selling at “severely distressed levels”.
Some analysts have put the worsening credit crisis down to banks hoarding cash before the end of the first-quarter reporting period. Ospel and Deutsche’s chairperson Josef Ackermann appeared to undermine any attempt at a positive outlook.
Ospel, who became chairperson in 2001, said the bank would seek a second capital injection to shore up its finances after raising £6,5-billion in February. Under the first round, the Singapore’s government investment fund bought 9% of the bank. It would not say if it was prepared to increase the size of its holding.
Analysts said investors would welcome the capital hike and the departure of Ospel as a chance to make a fresh start.
“I have always stated that I ultimately take responsibility for the bank’s situation,” Ospel said after the UBS board agreed to appoint the bank’s chief lawyer, Peter Kurer, to take charge.
“My willingness to stand for re-election for a further one-year term was based on my desire to lead UBS out of its current difficult situation,” Ospel said. The bank said its move to raise capital through a rights issue would be fully underwritten by four leading international banks and enable it to remain “one of the world’s strongest and best capitalised banks”.
The measures mean that UBS is now a restructuring stock, analysts at JP Morgan wrote in a note to investors. “We conclude UBS is aiming to put a line below its risk-exposure problem and refocus on operational business,” JP Morgan’s Kian Abouhossein said.
But Octavio Marenzi, head of financial consultancy Celent, said the UBS disclosures were “a clear indication that we are not out of the woods yet in terms of the credit crisis”.
“Indeed, the storm clouds are gathering ever more rapidly over the banking industry and, in particular, the US banking industry, where most of UBS’s losses originated from,” Marenzi said.
Saving Zurich’s stature
Swiss banks were once bywords for caution, but have become caught up in the US subprime mortgage debacle like their rivals elsewhere. UBS remains the bank of choice for wealthy investors, but the recent revelations that it holds billions of pounds of worthless subprime mortgages has knocked confidence.
Marcel Ospel, the outgoing chairperson, admitted thousands of customers had withdrawn their deposits in recent months, though this had not reached critical levels.
Credit Suisse, Switzerland’s other major investment bank, is expected to unveil more losses, but on a far more modest scale — less than two weeks ago it flagged a first-quarter writedown of about £500-million.
Regulators want to crack down on banks’ risk-taking and a flurry of speeches and initiatives in recent days has been aimed at restoring some confidence in the financial system.
United Kingdom Prime Minister Gordon Brown has been making repeated calls for financial institutions to assess their losses and make prompt writedowns. “The chancellor is calling for international standard-setting bodies to provide clear guidance so that we have proper valuation of these write-offs,” he said.
His comments, which helped send the FTSE 100 up 150,5 points to 5 852,6, followed those of the Bank of England governor Mervyn King, who warned banks that they face a tougher regime with stricter limits on how much cash they keep to cope with similar crises.
King told a gathering of bankers in Jerusalem that liquidity would become a chief concern of regulators as they sought to protect the financial system from a repeat of the current lending freeze.
The Swiss federal banking regulator, EBK, said it wanted to increase capital reserve requirements for investment banks once the industry has recovered from its ongoing turmoil.
United States Treasury Secretary Hank Paulson wants greater powers for the Federal Reserve to intervene, and a similar approach has been outlined in a proposed revamp of the British system. — Â