Activity in the US sub-prime area continues to hot up, with UBS acting to strengthen their balance sheet at the same time as announcing that there is not likely to be a profit this year. The measures are:
- Issue an additional13bn (CHF) in fresh capital;
- Sell about 2bn in treasury shares they had figured on cancelling; and
- Pay this year’s dividend in stock.
This is all from revising “…key input parameters of the models that are used to estimate lifetime default and resulting losses for sub-prime mortgage pools.” In other words we got our mark-to-models wrong and we changed them.
I continue to maintain that the whole sub-prime problem is over-done, with the banking system in general able to absorb these losses with ease – but individual banks getting caught. From their press release, UBS would have been able to absorb these losses out of profits from other areas and some capital deterioration but decided not to – presumably because they wanted to reassure the markets on their capital base.
It may also be that they have adopted very conservative valuations, having been caught once. We will see over the next 6 to 18 months.
Look for heads to roll there over the next few months. Investors hate thi