UBS May Take Further Subprime-Related Writedowns

Both Bloomberg and MarketWatch feature stories on the possibility of further mortgage-debt triggered writeoffs at UBS. Readers may recall that the markets took cheer when UBS announced its third quarter chargeoffs, believing the bank and its peers were putting their troubles behind them. However, the bank now has lower

MarketWatch cited a Swiss newspaper that said an unscheduled UBS board meeting was taking place over the weekend, and noted that the bank had written off SFr4.2 billion in subprime assets, but still had Sfr 39 billion remaining.

Analysts now believe that UBS has considerably more losses to dispose of, but will do so gradually, rather than all in the fourth quarter. (I’m surprised they have that much latitude, but then again, I’m not certifying their books)>

Bloomberg gives more detail from the analysts:

UBS AG, Europe’s biggest bank by assets, may have to take further writedowns on fixed-income securities after the U.S. subprime mortgage crisis rattled debt markets, ABN Amro Holding NV analyst Kinner Lakhani said.

“The industry has been moving to more aggressive markdown rates,” said Lakhani, who recommends investors hold the stock. “UBS has $20 billion of collateralized debt obligation exposure and to date has taken markdowns well below industry benchmarks.”

UBS’s board is holding extraordinary meetings this weekend before the bank’s investor day in London on Dec. 11, and the bank may cut its profit outlook as soon as tomorrow, SonntagsZeitung reported today, without citing anyone. UBS spokeswoman Tatjana Domke declined to comment on the article when contacted by Bloomberg.

The bank, which reported its first loss in almost five years in the third quarter after the U.S. subprime mortgage contagion led to about $4.66 billion in writedowns on fixed- income securities and leveraged loans, has said it expect to return to profit in the fourth quarter. Securities firms and banks announced about $66 billion of losses and markdowns linked to the collapse of the U.S. subprime market this year.

“UBS has to make a decision whether it’s in line with previous guidance or not,” said Kian Abouhossein, a London- based analyst at JPMorgan Chase & Co. with an “overweight” rating on UBS. “Equity markets would like the full clean up.”

Abouhossein last month estimated that UBS may write down 3 billion Swiss francs ($2.66 billion) in the fourth quarter and 12.8 billion francs in 2008. A significantly bigger write-off this quarter could result in rating companies cutting their view on the bank’s debt, a scenario UBS might want to avoid because it would create negative publicity and damage its private banking business, he said.

“I’d be surprised if they write down everything in one go,” he said. “Based on UBS’s expected loss model, writedowns over several quarters are more likely.”

The bank may write down about 2.6 billion francs in the fourth quarter, according to the average estimate of five analysts who published their forecasts over the past month. Taking a larger writedown would mean that UBS may have to sell new shares and forego a dividend for this year, analysts including Bear Stearns Cos.’ Christopher Wheeler have said.

To bring its writedowns into line with those of New York- based Merrill Lynch & Co., the third-largest securities firm, UBS would have to take about 8.5 billion francs in pretax writedowns, Lakhani said.

UBS said on Oct. 30 that it had $16.8 billion invested directly in residential mortgage-backed securities at the end of the quarter. It also had $1.8 billion of collateralized debt obligations, bonds created by repackaging other debt securities, as well as $20.2 billion of so-called super senior securities, or AAA-rated structured debt that gets paid back ahead of other similarly rated bonds in case of a default.

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  1. doc holiday

    At the end of October 2007, the net worth of commercial banks in the US (as reported by the Fed) stood at just under $ 1.1 trillion (against assets of $10.7 trillion). Tier 1 capital stood approximately at $964 bn. While quite a significant share of the mortgage-related losses will be born by financial institutions other than commercial banks, such as investment banks, commercial banks’ capital will take a significant hit. In addition, US commercial banks have, through unused liquidity commitments, obligations of up to $350bn to sponsored conduits that used to fund themselves with ABCP; they also are exposed to the risk of having to take back and hold up to $140bn of loans taken out for failed leveraged buy-out type deals, and are warehousing, at a loss. an indeterminate but significant amount of loans and other assets that were intended for securitisation, or packaging into other complex structures. The combination of losses and unintended asset accumulation may depress the banks’ capital ratios to the point that dividends and share repurchases are threatened and even rights issues may have to be contemplated. All that does not do much for their willingness to engage in new lending, including to the real economy.

  2. doc holiday

    Roubini quote

    I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

  3. doc holiday

    Chairman Ben S. Bernanke
    At the Economic Club of New York, New York, New York
    October 15, 2007
    The Recent Financial Turmoil and its Economic and Policy Consequences ne…ke20071015a.htm

    The problems in the mortgage-related sector reverberated throughout the financial system and particularly in the market for asset-backed commercial paper (ABCP). In this market, various institutions have established special-purpose vehicles to issue commercial paper to help fund a variety of assets, including some private-label mortgage-backed securities, mortgages warehoused for securitization, and other long-maturity assets. Investors had typically viewed the commercial paper backed by these assets as quite safe and liquid, because of the quality of the collateral and because the paper is often supported by banks’ commitments to provide lines of credit or to assume some credit risk. But the concerns about mortgage-backed securities and structured credit products (even those unrelated to mortgages) greatly reduced the willingness of investors to roll over ABCP, particularly at maturities of more than a few days. The problems intensified in the second week of August after the announcement by a large overseas bank that it could not value the ABCP held by some of its money funds and was, as a result, suspending redemptions from those funds. Some commercial paper issuers invoked their right to extend the maturity of their paper, and a few issuers defaulted. In response to the heightening of perceived risks, investors fled to the safety and liquidity of Treasury bills, sparking a plunge in bill rates and a sharp widening in spreads on ABCP.

    The retreat by investors from structured investment products also affected business finance. In particular, issuance of collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs), which in turn had been major buyers of leveraged syndicated loans, fell off significantly during the summer. Demand for leveraged loans slowed sharply, reducing credit access for private equity firms and other borrowers seeking to finance leveraged buyouts (LBOs).

    Loans through the discount window differ from open market operations in that they can be made directly to specific banks with strong demands for liquidity. (In contrast, open market operations are arranged with a limited set of dealers of government securities.) In addition, whereas open market operations typically involve lending against government securities, loans through the discount window can be made against a much wider range of collateral, including mortgages and mortgage-backed securities. As with open market operations, however, Fed lending through the discount window provides banks with liquidity, not risk capital. In particular, the strong collateralization accompanying discount window credit eliminates essentially all risk for the Federal Reserve System and the taxpayer.

  4. doc holiday

    The Fed has kept these various risks to growth and inflation in mind when responding to the financial turmoil this year. Importantly, we have taken a number of monetary policy actions to insure against the risk of costly contagion from financial markets to the real economy. On August 10, in response to a sharp rise in the demand for liquidity, the Fed injected $38 billion in reserves via open market trading. In one sense, this was a routine action to inject sufficient reserves to maintain the target federal funds rate at 5-1/4 percent—the non-routine part was the size of the injection required to do so. (Indeed, this was the largest such injection since 9/11.) On August 16, with conditions having deteriorated further, the Federal Reserve Board, in consultation with the District Reserve Banks, moved to improve the functioning of money markets by cutting the discount rate by 50 basis points and extended the allowable term for discount window loans to 30 days. The Board also reiterated the Fed’s policy that high-quality ABCP is acceptable collateral for borrowing at the discount window. At its regular meeting on September 18, the FOMC cut the federal funds rate 50 basis points and then lowered it another 25 basis points at its meeting in October. Related actions by the Board of Governors lowered the discount rate to 5 percent. Finally, just yesterday the Open Market Desk at the New York Fed announced that it will conduct longer-term repurchase agreements extending into January 2008 with an eye toward meeting additional liquidity needs in money markets.

  5. doc holiday

    This one sentence is worth reading a few trillion times:

    commercial paper issuers invoked their right to extend the maturity of their paper, and a few issuers defaulted.

    You know what he means there????

  6. doc holiday

    Ill go back to the other later, but this is from Brad delong page:

    KKR Financial has been hit by a pullback by banks and other lenders from investing in “jumbo” mortgages of more than $417,000, according to people familiar with the situation…. The KKR commercial-paper issuers, KKR Atlantic Funding Trust and KKR Pacific Funding Trust, asked to delay the repayment and extend the notes’ maturity for up to six months, citing “the unprecedented disruption in the residential mortgage and global commercial-paper markets.”

    The two issuers raised money with $500 million in equity backing from KKR Financial and invested in mortgage securities based on a debt-to-equity ratio of about 20 to 1, said the people familiar with the situation. Such mortgages might fetch only 90% or less of their face value now, these people said.

    Re: Pacific Funding Trust, asked to delay the repayment and extend the notes’ maturity for up to six months

    Ok, thats another clue..

  7. doc holiday

    Fed Lowers Rate in Futile Effort to Save Bankrupt Bankers

    Aug. 17, 2007 The Wall Street Journal’s lead editorial Friday praised Treasury Secretary Hank Paulson for orchestrating the $11.5 billion bailout of Countrywide yesterday, but screamed that the LBO giant Kohlberg Kravis Roberts (KKR) deserves the same federal largesse. KKR is not only holding $80 billion in scheduled buyouts, with little hope of finding the needed credit to finance them, but they also were stuck this past week with $5 billion of asset-backed commercial paper which creditors would not role over, leaving KKR begging for a six month delay.

    KKR Subsidiary Unable to Pay $5 Billion Short-Term Debt Due

    August 18, 2007 (LPAC) — KKR Financial Holdings LLC, a subsidiary of private equity buyout bandits Kohlberg Kravis Roberts & Co., yesterday tried to delay payments for six months on $5 billion of short-term asset-backed commercial (ABC) paper coming due immediately. The paper is held by 15 investors, several of them money-market funds.

    Earlier in the day, KKR Financial had disclosed that they stood to lose up to $290 million in “jumbo” mortgages of over $417,000, the largest mortgage which the federal Fannie Mae and Freddie Mac will buy.

    The two subsidiaries of KKR Financial which issued the ABC paper had $500 million equity backing from the parent company, and leveraged it about 20 to 1, to $10 billion, to buy mortgage securities and issue short-term, “high-quality” commercial paper. But Fitch Ratings downgraded the paper yesterday from its highest rating to junk, saying the KKR issuers had breached some of their collateral tests.

    Kohlberg Kravis Roberts & Co. owns about 12 percent of KKR Financial Holdings. The Journal asks whether Kohlberg Kravis will now try to bail out its subsidiary, as Bear Stearns and Goldman Sachs have sought to bail out their failed hedge funds over the last two weeks.

  8. doc holiday

    Anyone remember what bonds triggered the panic in Florida a few weeks ago, yah know the pension thing???

    Is there a pattern here, a little collusion maybe???

    Nov. 20 (Bloomberg) — In the Wall Street game of greed and fear, greed is once again asserting itself with Henry Kravis, Stephen Schwarzman and Leon Black.

    After sticking banks with more than $300 billion of leveraged buyout debt, New York-based Kohlberg Kravis Roberts & Co., Schwarzman’s Blackstone Group LP and Black’s Apollo Management LP are raising money for collateralized loan obligations that will buy the assets for as little as 95 cents on the dollar.

    Morgan Stanley, Citigroup Inc. and their Wall Street competitors, which reaped a record $8.4 billion in fees from the buyout firms in the first half of 2007, financed at least seven private-equity CLOs in the past two months, while cutting off other managers, according to data compiled by Bloomberg. KKR officials said they accounted for about 40 percent of the funds created since August.

    “Private equity firms are such big repeat customers that they can demand investment banks” serve them, said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. “They’ll say `we’re going to shut you out of future business if you don’t give us what we want.”’

    KKR Financial Holdings LLC, the publicly traded affiliate of KKR that invests in credit markets, raised two and started a third CLO in the past month from banks including Morgan Stanley, the second-biggest U.S. securities firm by market value, U.S. Securities and Exchange Commission filings show.

    CLOs, a form of collateralized debt obligations, buy high- yield, high-risk loans and package them into new securities. The loans are typically rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

    Blackstone, Apollo

    Schwarzman’s Blackstone persuaded Citigroup, the largest U.S. bank by assets, to do the same for a $570 million CLO, Bloomberg data show. Black’s Apollo funded the purchase of $1 billion in high-yield loans from Bear Stearns Cos. at a discount, according to people familiar with the matter who declined to be identified because the terms haven’t been disclosed. All of the firms are based in New York.

  9. doc holiday

    Cheyne Default

    Thousands of school, fire, water and other local districts across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money market funds, are supposed to invest in safe, liquid, short-term debt such as U.S. Treasuries and certificates of deposit.

    All told, there were about 100 such pools, containing more than $200 billion at the end of 2006, according to Westborough, Massachusetts-based iMoneyNet, a research firm that tracks these funds.

    Public fund managers say they’ve bought SIV debt because it had the safest credit ratings and offered higher yields than other short-term fixed-income investments.

    SIVs, many of which are assembled by London-based bankers, had a low profile until some of them collapsed. The $7 billion Cheyne Finance SIV, incorporated in Delaware, defaulted on Oct. 17.

    Two days before that, Treasury Secretary Henry Paulson, former CEO of Goldman Sachs Group Inc., stunned investors by saying banks had agreed to start a private fund of about $80 billion to help bail out the $320 billion in SIVs that may run short of cash to pay investors.

    `High-Risk Investments’

    Without such protection, SIVs may be forced to auction their debt at substantial discounts, leading to immediate recognition of tens of billions in losses. When Paulson proposed the fund, few people had heard of SIVs. Even fewer knew that states were buying their commercial paper.

    KKR Credit Fund

    As recently as Oct. 24, the board’s investment oversight committee allowed the pool to keep a total of $532 million in downgraded commercial paper from KKR Atlantic Funding Trust and KKR Pacific Funding Trust.

    The debt of both had been lowered to D for default by Fitch Ratings, after they had been downgraded to B, or junk, from F1+ two months earlier. That debt was assembled by San Francisco- based KKR Financial Holdings LLC, a publicly traded credit fund partially owned by buyout firm Kohlberg Kravis Roberts & Co.

    The committee also approved keeping $180.7 million in paper from Ottimo Funding, registered in the Cayman Islands, which on Oct. 3 had been cut to junk by S&P from A-2, its third-highest rating. On Oct. 17, Moody’s cut Ottimo to Not Prime from Prime- 1.

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