Toomre Capital Markets LLC ("TCM") made a post back on November 3rd 2007 entitled UBS Has a "SMALL" VaR Risk Modeling Problem. A key point in that post regarded how badly the UBS investment bank' risk management area missed in the calculation of the bank's economic risks. For instance, the third-quarter UBS economic report card revealed that the bank's trading areas had sixteen trading days out of sixty-three or so where the daily losses exceeded that projected by the daily Value-at-Risk ("VaR") at the 99% confidence interval level. With the December 10th 2007 announcement of its additional $10 billlion in losses at UBS, no doubt there will be a number of days during the fourth quarter where the actual losses will exceed the calculated VaR. An interesting question still to be answered is how many days did they miss on?

Probably the most key parameter for any VaR model is volatility, both in the size of positions and in the prices at which those positions are marked. Likely, a key reason why the UBS risk management area missed on so many days during the third quarter is that their volatility estimates of prices were simply averages of the last five years of observations and did not give extra weight to the recent period when prices began to deviate significantly from the near par prices. CDO prices have now been declining for several months and there is considerable question about what the heck CDOs are worth and what should be used in various analytical risk models.

For counter-parties and investors, a key question remains after the $10 billion write-down announcement at UBS. What amount of subprime investments and CDOs does UBS still own, and perhaps even more importantly, where are they now valued?

At the end of the third quarter, UBS was rightly criticized for how its "mark-to-model" valuation results only reflected payments data from the underlying mortgage loans and did not reflect the market price information that led both Merrill Lynch and Citigroup to make much more significant mark-downs in what super-senior CDO positions were worth. Currently, the news reports are somewhat confusing about whether UBS still owns $29 billion dollars in market value of subprime and CDO securities or if some $29 billion in such securities are now marked down by $10 billion with the mezzanine CDO tranches now marked to something like 45 cents on the dollar.