Ruh-Roh - UBS Writes Down $3.42 Billion Due to Credit Crunch

This can’t be good. UBS will take a $3.42 billion write down relating to credit woes, primarily in its fixed-income portfolio (see mortgage backed securities). This is the first quarterly loss for the financial giant in 9 years. And $3.42 billion ain’t a blip on the old radar screen, even if you are the world’s largest wealth manager. It sounds eerily similar to this story of an employee doing mortgage backed securities deals on Wall Street. From the CNBC article:

The bank’s losses resulted from applying sharply lower market values to asset-backed bonds, after it took a conservative view, the Journal said, citing people close to the matter.

The losses, which far exceed those reported so far by other investment banks, are expected to trigger the departure of Huw Jenkins, who runs UBS’s investment banking business, the Financial Times said on its website.

…

Persistent worries about the health of the banking system have weighed on financial markets around the world. A meltdown in the U.S. subprime mortgage market, sparked by growing defaults on riskier loans, has created a squeeze in credit markets around the world.

An interesting point here is that these banks and financial institutions are taking their own write downs on assets that are not being sold. This means that they can give them whatever value they feel is reasonable (based on today’s market sale price and some highly technical analysis). UBS takes a large write down for being “conservative” about the value; but the true value of these underlying assets both short and long term is murky at best. As our friend Keith likes to say their value isn’t truly known until they are “Marked to Market“. Even using today’s sale prices of these assets it is impossible to get a bead on future value because the performance of the underlying collateral (the mortgages) has been poor and continues to worsen. Until these assets are sold there is no way to get an accurate assessment of their true worth.

Think of it this way: you have a a pack of cards which you are fairly certain contains Barry Bonds rookie baseball card, which Beckett baseball card guide says is worth $800. You decide that you aren’t going to sell the pack of cards, because you want to keep it as an asset for yourself. Someone asks you to value the card. You say that while Beckett values the card at $800, you are taking a conservative approach due to the recent steroid scandal with Bonds and value it at $550. You’ve written down your asset worth $250. But you won’t really know what someone will give you for that card until you take that pack of cards to the traveling baseball card trade show and shop it around. You could get $150 for it. You could find out that the supposed Barry Bonds card in that pack is actually a Razor Shines rookie and its worth $0.15.

The scary implication is that these firms taking write downs on their fixed-income portfolios are determining what those write downs should be with out the true value of the asset being known. In other words, it’s devalued and Marked to Market within a market that is currently in turmoil. No one knows what the true future value of the asset is, because no one knows how poorly the underlying mortgages will perform. I mean, while the housing market has no sign of bottom, at least the assets are being marked to market on a daily basis; we can’t even get that on Wall Street yet.

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