Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

UBS: Still Cannot Quantify Its Exposure to Sub-prime Crisis

As readers of the Toomre Capital Markets LLC ("TCM") blog might note, TCM has highlighted the problems that one of Lars Toomre's previous employers, UBS, has been having with CDOs and risk management. UBS was very deficient in these areas back in the 1994 interest rate spike period and apparently is little improved more than thirteen years later. The reader may want to review, for instance, the previous TCM posts: UBS Has a "SMALL" VaR Risk Modeling Problem, UBS: What's Another $10 Billion Dollar Loss Worth? and What is UBS' Remaining Subprime/CDO exposure?

Lars Toomre wrote the last of the aforementioned posts on December 12th 2007. Apparently it was very apropos. On Saturday January 10th 2008, The Financial Times reports in a story written by Miles Costello that UBS management apparently does not know what its CDO/sub-prime exposure is either. The article is entitled UBS admits that it still cannot quantify its exposure to sub-prime crisis and is well worth reading in full.

A key section of UBS Management's January 11th 2008 letter to investors reads: “We cannot, at this time, accurately predict the future development of US residential mortgage markets and therefore the ultimate impact on our positions in sub-prime mortgage related securities,” the bank told investors in a letter signed by Marcel Ospel, the chairman, and Marcel Rohner, the chief executive.

Something seems mighty odd with UBS' on-going disclosures about its CDO/sub-prime exposures. TCM strongly suspects that UBS has been less than completely forthcoming and that the CDO/subprime losses will be larger than the market consensus currently expects. The saying used to be "something does not smell right in Denmark." Perhaps it should be adjusted to say "something does not smell right in Zurich"? Time will tell, especially with this week's forthcoming block buster losses from Merrill Lynch and Citigroup.

Is it just TCM? But did not a BILLION dollars used to mean an obscenely large, unbelievable amount of money? In a good year, a large global investment bank might make several billion dollars in earnings. How then is the market so numb to losses of three, five, seven, ten and even more billions in a single quarter? With such tremendous losses, any sane investor really has to question whether institutions such as UBS, Merrill Lynch, Citigroup, Morgan Stanley, Bear Stearns, CIBC and other global investment banks should be rated investment grade????