UBS

Marcel waves goodbye

The boss departs after more big subprime-related writedowns at UBS

NOT long ago, when an illustrious bank was in trouble, it could announce, with some fanfare, the support of sovereign-wealth investors from the Gulf states or the Far East. In December, when UBS secured SFr13 billion ($11.5 billion) in such funds from Singapore and the Middle East, some of its long-standing investors grumbled that they, too, should have been given the opportunity to help recapitalise the bank on the same generous terms.

Be careful what you wish for. On Tuesday April 1st UBS announced – and it was no prank – that it was writing down a further $19 billion on its investments in American subprime and other mortgages, as part of an unexpected SFr12 billion projected loss in the first quarter. The Swiss bank also said it would call on its shareholders to supply SFr15 billion in additional funds to shore up its depleted reserves of capital. That means its sovereign-wealth backers face severe dilution, in addition to the potential losses that they have already suffered on their holdings since December. In penance, Marcel Ospel, architect of the merger that created UBS in 1998, said he would step down as chairman, to be replaced by Peter Kurer, the bank’s general counsel.

Even for long-term investors such as sovereign-wealth funds, experiences such as that suffered at UBS are painful. But they are not unique; by one estimate, sovereign-wealth funds as a group have lost about a third so far from their investments in Western banks and private-equity firms during the current credit crisis. Do not expect them to have cheque books at the ready the next time an ailing Western bank has a whip round.

That is why banks are now tapping ordinary shareholders instead. On Tuesday Lehman Brothers raised $4 billion from selling additional shares to strengthen its capital and convince the financial markets it was not headed in the same sorry direction as Bear Stearns. By some estimates banks are preparing to issue $100 billion in new debt and equity this year.

So far, shareholders have been surprisingly receptive to the cash calls. Lehman’s shares went up by 11% in New York after the announcement and UBS’s shares also climbed sharply higher. Both are benefiting from a period of relative calm in the financial markets—which is probably why they decided to act at this time.

But if they set a precedent, a rush to raise capital may well be painful for both banks and shareholders. Meredith Whitney, an analyst at Oppenheimer, expects a “barn rush” of firms trying to raise capital, and believes it will get more expensive as the year progresses. Nor is there much hope that UBS’s poor first-quarter performance was a one-off. On Tuesday Deutsche Bank, which had sailed through the crisis fairly smoothly last year, announced a €2.5 billion ($3.9 billion) writedown on leveraged loans, commercial property and mortgage-backed securities. March, the month in which Bear Stearns almost collapsed, was considered particularly tough for the industry as a whole.

But is the worst over now? That was one implication from the fact that UBS was able to sell some—though it won't say how much—of its poor quality mortgage positions between January and March. On the other hand, it still has $31 billion of those problem securities on its books, so it is by no means free yet.

It was also considered positive that four leading investment banks, JPMorgan, Morgan Stanley, BNP Paribas and Goldman Sachs, are fully underwriting its share issue. They demanded an “aggressive” valuation as part of their due diligence of UBS, according to Daniel Zuberbuehler, director of the Swiss Federal Banking Commission. That suggests they are comfortable with UBS’s numbers, which should be somewhat reassuring to investors. Unless the markets continue to slide again, that is.