Revising its estimates for losses on defaults in U.S. subprime mortgage pools, Swiss bank UBS AG said Monday it’s writing down the value of those investments by an additional $10 billion, and may record a net loss in 2007.
On Oct. 1, UBS announced $3.4 billion in write-downs, most on securities related to subprime mortgages, and said it would lay off 1,500 workers (see Inman News story).
At the time, the bank valued its remaining positions in direct subprime mortgage-backed securities (MBS) at $19 billion, consisting “overwhelmingly” of AAA-rated tranches, and reported an additional $4 billion of exposure to subprime securities through warehouse lines of credit and retained collateralized debt obligations (CDOs).
Since then, conditions in U.S. mortgage and housing markets have continued to deteriorate, and UBS has updated its loss assumptions “to the levels implied by the current distressed market for mortgage securities,” said Group Chief Executive Officer Marcel Rohner in a statement.
“In the last several months, continued speculation about the ultimate value of our sub-prime holdings – which remains unknowable – has been distracting,” Rohner said. “In our judgment these writedowns will create maximum clarity on this issue and will have the effect of substantially eliminating speculation.”
The announcement came on the eve of Tuesday’s meeting of the Federal Reserve Open Market Committee, and many stocks rose Monday as investors anticipated additional cuts in short term interest rates.
Concerns that mounting losses in mortgage lending threaten economic growth and outweigh the risk of inflation, the Fed on Sept. 18 slashed 50 basis points off the federal funds and discount rates. The Fed made less drastic cuts in both rates on Oct. 31, lowering its target for the federal funds rate 25 basis points to 4.5 percent, and cutting the discount rate by the same amount, to 5 percent.
UBS said it’s rounded up about $11.5 billion in additional capital, from a government-backed investment corporation in Singapore and “an undisclosed strategic investor in the Middle East.”
The Government of Singapore Investment Corporation Pte. Ltd., is providing $9.75 billion, while the undisclosed Middle East investor will provide the remainder.
The influx of capital from those and other sources boosts the bank’s tier one capital ratio above 12 percent, compared to 10.6 percent on Sept. 30.
“Our losses in the US mortgage securities market are substantial but could have been absorbed by our earnings and capital base,” UBS Chairman Marcel Ospel said in a statement.***
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