UBS reveal the truth about the most stinky deal ever!
From Robert Peston, BBC's Economics Editor:
Wednesday's Picks
UBS's real loss
- Robert Peston
- 21 May 08, 08:29 AM
For months now, bankers have been taking some small comfort from the nature of their losses on subprime lending.
They have suffered markdowns, but these are not real cash losses. They are reductions in the market value of securities backed by subprime, to reflect a fall in the market price.
And that fall in the market price has been exaggerated, or so the argument runs, by the total evaporation of liquidity in these markets.
So in theory, the final losses suffered by banks could turn out to be much less than the losses they've announced, if the banks were to hold their subprime securities till all the borrowers of subprime money have either repaid or till those borrowers have defaulted and had their respective properties seized and sold.
That was, for example, the implication of a recent analysis by the Bank of England, which said that it thought subprime was being priced at a level that was surely lower than the underlying economic reality would justify.
https://teakdoor.com/images/smilies1/You_Rock_Emoticon.gifSo that's the context for assessing the significance of this morning's confirmation by UBS, the giant Swiss bank, that it has sold $22bn of subprime, Alt-A (a grade of US mortgage debt just a bit better than subprime) and prime mortgage-backed securities for $15bn.
It represents a loss for UBS of $7bn or 32% - not a notional accounting loss, but a real loss of hard cash.
And to add insult to very genuine self-inflicted harm, UBS is providing an $11.25bn loan to the buyer of all this stinky US mortgage debt, which is the fund management group BlackRock.
So UBS has suffered a genuine, eye-wateringly large loss on the sale of assets it should never have accumulated, but is remaining exposed to those assets to the tune of $11.25bn.
As I write, my brain can't quite come to terms with the extraordinary financial implications of all this, even though the terms of the deal have been known for some time.
Does it mean that the credit crunch must be nearing an end, when there is such an extraordinary example of what investors call "capitulation" by UBS?
Or does it mean that we're still at the end of the beginning, in that it's impossible to do an arms length deal even at a knockdown price?
The same question is posed by yesterday's deal that reopens the British mortgage-backed securities market, HBOS' piddling sale of £500m of securities backed by prime UK mortgages.
It's the first sale of mortgage-backed bonds by a British bank since last August.
But the amount is a fraction of what HBOS would typically have sold before the market shut down. And HBOS is paying an extraordinary amount for the money - 0.85 percentage points above LIBOR, even though the £500m is backed by mortgages worth about £800m.
It shows you how much international investors fear the prospects for the British housing market if they are only prepared to lend money to HBOS at more than 6.5%, even when the collateral is worth between 30 and 40% more than the loan.
That is scary.
The Bank's Lies About Losses Bubble to the Surface...
Libor Cracks Widen as Bankers Struggle With Reforms (Update2)
By Gavin Finch and Ben Livesey
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May 27 (Bloomberg) -- Few companies have suffered from the subprime mortgage collapse more than UBS AG, which has taken $38 billion of writedowns and losses, replaced its chief executive officer and chairman and saw its stock tumble 60 percent.
Yet on 85 percent of the days between July and mid-April, the Zurich-based bank told the British Bankers' Association that it could borrow in the money markets at lower interest rates than its rivals. Not even the U.K.'s Lloyds TSB Group Plc, which only wrote down $1.4 billion, could obtain the rates UBS said it was able to get, according to data compiled by Bloomberg.
``Even when the market knew UBS was massively exposed and Lloyds wasn't, that was not reflected in Libor,'' said Antony Broadbent, an independent banking consultant and former analyst at Sanford C. Bernstein & Co. in London.
Such discrepancies are creating a crisis of confidence in the London interbank offered rate published daily by the London- based BBA and taken from the contributions of UBS, Lloyds TSB and 14 other banks. Rates on corporate bonds, leveraged buyouts loans, derivatives and even U.S. mortgages are pegged to Libor.
The criticism has prompted the BBA to accelerate a review of the 24-year-old system of setting rates. The findings, due May 30, may determine how fast the banking industry recovers from the credit crisis.
`People Get Hurt'
``You've got to fix Libor,'' said Tim Bond, head of asset allocation strategy in London at Barclays Capital, a unit of Barclays Plc, one of the banks that provide quotes to the BBA. ``You don't ever want to be in a situation like this again, where people can get away with quoting whatever rate they like. Real people get hurt like this.''
Libor is a benchmark for about $350 trillion of debt- related securities and derivatives, according to the Bank for International Settlements in Basel, Switzerland. The rate that San Antonio-based AT&T Inc., the biggest U.S. phone company, pays on $2 billion of notes it sold on March 27 floats at three- month Libor plus 0.45 percentage point.
``Libor is baked into the global financial system,'' analysts at JPMorgan Chase & Co. led by Terry Belton, global head of fixed-income and foreign-exchange research, wrote in a May 16 report. ``The question of whether a benchmark could be designed that is less flawed than Libor is debatable; whether such a benchmark could effectively replace Libor is not.''
Libor Exposed
Every morning the BBA, an unregulated trade group, asks member banks how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about 11:30 a.m. in London. Three-month dollar Libor was set at 2.64 percent today.
Libor was thrust into the spotlight in August as the subprime-mortgage contagion spread and banks were suddenly wary of lending to each other because of mounting losses that reached $383 billion as of last week, data compiled by Bloomberg show.
Three-month Libor soared to 2.40 percentage points above yields on Treasury bills on Aug. 20, the widest margin since December 1987 and up from 0.39 percentage point a month earlier. The figure was 0.80 percentage point today.
The credit crisis exposed Libor's flaws, according to Peter Hahn, a London-based research fellow for Cass Business School and a former managing director at Citigroup Inc. That's because the BBA publishes the names of contributors and their rates, giving lenders an incentive to underestimate borrowing costs to keep from appearing like they are in financial straits.
Rates `a Lie'
In the first four months of 2007, the difference between the highest and lowest rates for three-month Libor didn't exceed 0.02 percentage point, according to JPMorgan. In the same period this year, it was as wide as 0.17 percentage point.
The BIS said in a March report that some lenders may have ``manipulated'' rates. Strategists such as Bond at Barclays went as far as calling the reported rates a ``lie.''
The BBA said on April 16 that any member deliberately understating rates would be banned. The cost of borrowing in dollars for three months rose 0.18 percentage point to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze in August.
Lesley McLeod, a BBA spokeswoman in London, would only say the association's review is ``ongoing'' and a ``robust process.''
Libor would be more reliable if banks offered rates anonymously, removing the stigma of appearing like they are having trouble accessing capital, said Bond at Barclays.
More U.S. Banks
For Brian Yelvington, a strategist at bond research firm CreditSights Inc. in New York, the solution is for the BBA to insist on proof that the rates quoted are based on real transactions. That way, there would be ``no way to hide since it goes from being a poll of sorts to a confirmed trade,'' he said.
The discrepancies wouldn't have been so pronounced if Libor were set at 10 a.m. New York time, making it less skewed toward Europe, JPMorgan wrote May 16. Only three U.S. banks contribute rates to the BBA: Citigroup, Bank of America Corp. and JPMorgan.
Any changes may be little more than cosmetic as a wholesale restructuring would disrupt the global financial system, said Barry Moran, a money-market trader at Bank of Ireland in Dublin.
``But the last thing you want to be doing in the middle of a financial crisis is implementing massive changes in the way the world's benchmark rate is set,'' Moran said.
UBS, the world's biggest wealth manager, and Lloyds TSB, the U.K.'s largest provider of checking accounts, underscore the wide range in rates quoted to the BBA since July.
HSBC, RBS
UBS's three-month offered rate in dollars averaged 1.3 basis points less than Libor from July through April 15. By contrast, Lloyds TSB quoted rates that were 0.04 basis point above Libor on average. A basis point is 0.01 percentage point.
In that period UBS ousted Peter Wuffli, 50, as chief executive officer after subprime-related losses at a hedge fund run by the bank, and Chairman Marcel Ospel, 58, who helped form UBS through a merger a decade ago, stepped down. UBS has slumped to 25.84 Swiss francs in Zurich from last year's high of 77.05 francs on Feb. 9, 2007. Dominik von Arx, a UBS spokesman in London, declined to comment.
HSBC Holdings Plc, Europe's largest bank by market value, gave rates that averaged 1.4 basis points less than Libor. The London-based bank has taken $19.5 billion in writedowns and charges. Royal Bank of Scotland Group Plc, the U.K.'s second- biggest bank, submitted rates that averaged 0.9 basis point below Libor. It has reported $15.3 billion in losses and writedowns.
HSBC spokesman Patrick McGuinness in London and RBS spokeswoman Carolyn McAdam in Edinburgh declined to comment.
From Bloomberg (Dubbed Gloomberg by some...):
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAA11bsMpVD4&refer=home
Bloomberg reset their graph perameters to show futher falls in Bradford and Bingley
Banking and Credit Crisis Enters New 'Turbulent' Phase - And The Fed's Out Of Cash!
From The Daily Telegraph:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/29/cndebt129.xml
US and European debt markets flash new warning signals
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 6:40am BST 29/05/2008
The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.
The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.
Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.
But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.
"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."
Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.
Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.
The jump in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. The true losses are already known to specialists in the business, said Mr Sels.
Bear Sterns Managers Arrested - how many more will follow?
Feds arrest two former Bear Stearns hedge fund managers
by The Associated Press Thursday June 19, 2008, 8:19 AM
Federal authorities said two former Bear Stearns managers have surrendered in New York City to face criminal charges in the wake of the collapse of the subprime mortgage market.
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Daniel Acker/Bloomberg NewsRalph Cioffi, former manager at Bear Stearns, is escorted by police officers to federal court in Brooklyn borough of New York today.
Authorities in Brooklyn are expected to give details later Thursday on the case against Ralph Cioffi, of Tenafly and Matthew Tanin, of Manhattan, who are ex-managers of Bear Stearns hedge funds that collapsed last year.
Officials told The Associated Press that the former executives are suspected of misleading investors about the risky subprime mortgage market. They have been the target of the yearlong probe.
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Justin Lane/EPAMatthew Tannin, a former Bear Stearns hedge fund manager, is escorted by law enforcement officials after being arrested in New York today.
Tannin's attorney has declined to comment and Cioffi's attorney has not responded to a phone message.
Last month, Bear Stearns shareholders approved JPMorgan Chase's $2.2 billion buyout at about $10 a share. Back in January 2007, before mortgage defaults began clobbering banks and draining demand from the debt markets, Bear Stearns had traded at $171 a share.
