UBS Gets Knocked Down to Size

The once mighty and monolithic UBS got knocked another notch closer to the mortal man today when it reported $7 billion loss for  fiscal fourth quarter 2008, then dropped the $17 billion full year bomb, the biggest ever by a Swiss group.

Always disdainful of disclosure, and constantly embroiled in crimes and cover ups, the autocratic bank's infamous and audacious accounting practices still cannot hide more than $50 billion written down since the credit bubble burst in July 2007. UBS is a mere vestige of it's former self, but bad old habits die hard as the bank provided only sketchy and twisted details of the losses and would seemingly have you believe it had absolutely no writes-downs this past quarter. The bank makes only scant reference to write-downs blaming the loss on trading losses, impairments to leveraged buy out loans, write-downs to mono-liner exposure, and a write down to Lyondell Chemcial Co., which it helped along with Goldman Sachs to underwrite the $21 billion takeover of by Basell AF of Rotterdam. But even the Golden Godfather was more forthcoming than UBS with respect to the loss relating to Lyondell.

The writedowns would add to at least $3.7 billion of losses related to Lyondell already acknowledged by Goldman Sachs Group Inc., Citigroup Inc. and Royal Bank of Scotland Group Plc. While Zurich-based UBS didn’t offer details, Chief Financial Officer John Cryan said on the call that the charges were “largely related to our exposure to LyondellBasell.” 

More shifty accounting cost the bank an additional $3.2 billion.

Chief Financial Officer John Cryan told analysts the group also avoided a $3.2 billion additional hit to its operating profit by moving around $15.8 billion of risky assets to its banking book from its trading book. The switch means the bank will hold the assets "for the foreseeable future" and therefore doesn't need to record a trading loss as their value falls.

If you crash your car and it's a total wreck your net worth drops instantly, but UBS can keep the original pre-crash price of the car on it's books, until the value of it recovers, another accounting caper that won't pay the bills, but by keeping  $15.8 billion on the balance sheet you can flip double or nothing for $3.2 billion. Okay here we go cowboy, UBS transfers the $15.8 billion loss to the banking book where it sits as $15.8 billion, but they can't get $.15 for it, nor will it ever recover.  So it lingers there, a pit stop on the way to a write-down, which by definition is a level 3 asset.

UBS the monolith, the monopoly that would not be, interrupted as it was by the greed of its own insiders who made the deals that generated the fees and drove the bonuses, leaving the bank holding the bag long after they had fled or been fired. UBS reached down into its well-connected dirty pockets and pulled up a monster sized bail out. The original deal made in October was supposed to transfer $60 billion of radioactive waste from the balance sheet of UBS to that of Switzerland's central bank, but UBS eventually transferred a mere $40 billion.

It has since transferred $40 billion in toxic assets to a fund run by the Swiss National Bank and received a SwFr6 billion injection of fresh equity from the Swiss Government in return for a 9.3 per cent stake.

UBS in turn was required to raise $6 billion which it did by issuing convertible notes. The hit to UBS more like a love tap was a 4.2 billion Swiss francs ($3.62 B) charge and a credit expense of 1.6 billion Swiss francs ($1.38 B). From the fourth quarter report.

UBS reached an agreement with the Swiss National Bank (SNB) in October. This allows UBS to transfer a large quantity of illiquid and other positions to a fund owned and controlled by the SNB. In a related transaction, UBS placed mandatory convertible notes with the Swiss Confederation in order to raise new capital. These two transactions impacted fourth quarter 2008 results by a net charge of CHF 4.2 billion. We recorded an own credit expense of CHF 1.6 billion, mainly due to redemptions of UBS debt during the quarter.

But for all the bail out and cover up eventually something just had to give and it did.  Profit and prestige evaporated when the credit bubble burst and investors, wealthy ones especially, ran on the bank.

Profit was down around 40% at the wealth management business, which looks after the group's rich clients, as the bank reported further outflows of cash. Clients withdrew a total of 85.8 billion francs from the group in the fourth quarter, including 58.2 billion francs from the wealth management business and business banking operation and 27.6 billion francs from the asset management side of the business. 

The outflows slowed toward the end of the quarter and turned into net inflows in January as confidence improved. The group also hired around 400 financial advisers in the U.S. in the fourth quarter to boost the region.

The outflows may have begun to trickle back, but not the trust of investors nor grudging respect of competitors. The bubble's burst, the booty's been had, the credit crisis for all it's damage has just begun, so out of fear necessity or because the banks the moves a bad bank makes, and  discloses in ways no balance sheet can hide. After announcing 9000 job cuts,  UBS said it will slash another 2000 jobs at the unit and increase the pay of the remaining investment bankers, it's a nice trickle up methodology, but in the prelude to the depression, investment banking is not where the profits will be made, though it's now obvious that's where they will go.

 “The hard work in terms of headcount reduction will now be behind us. 15,000 is the right staffing level for our new investment bank.”

The hard work is just beginning if your one of those let go, and if you are you are not making enough to afford it any way.

Like a former champion who hung on too long UBS staggers, in the middle of the ring awaiting the knockout blow. UBS once mighty and monolithic now needs the little people just to help it up.  Sad ending for UBS you ask, of course not; what else are little people for?