UBS Poised for More Losses, Executives Selling Rights to Buy Shares

UBS is scheduled to take more losses on its mortgage holdings, as prices for these securities have worsened dramatically in the past few weeks.  It is too bad that the deterioration of the UK mortgage market and the supposedly AAA-rated garbage that UBS still carries on its books couldn't wait until UBS had completed its 15.96 billion Swiss franc capital-raising extravaganza.  The results of the rights issues will be announced Friday, and apparently it is still on track to succeed.  Some UBS executives and board members have actually been selling their rights to buy shares, attempting to decrease their holdings in the beleaguered bank.  From an investor's perspective, I don't blame them; I'd be looking to unload that turkey out of my portfolio too.  However, this does not inspire confidence in the rights issue which is being offered at a discount to the market price, although the magnitude of that discount decreases day after day with the slumping stock price.  I personally lost confidence in UBS when I read Bloomberg magazine's terrific account of how UBS lost buckets of money in the past year.  

According to the Bloomberg story, in 2005, UBS spun off its extremely profitable (at the time) fixed-income proprietary group into a hedge fund that had access to cheap funding from UBS and collected 3 and 35 in management fees from its parent.  The former investment banking chief, John Costas, saw those fees and liked them.  He was appointed the new head of the hedge fund spin-off called Dillon Read Capital Management (DRCM).  His investment banking replacement, Richard Jenkins, formerly head of equities, and Simon Bunce, the new fixed income chief, apparently had no risk management experience.  To make up of for his short-comings, Jenkins hired the consulting firm Mercer Oliver Wyman, a unit of Marsh & McLennan, to review the business.  The consultant's conclusion?  UBS needed to get in the CDO business.  Jenkins did what any shrewd investment banking chief would do when taking advice from a consultant from an insurance company that was, at the time, being accused of violating a slew of insurance and investment regulations.  Jenkins got in the CDO business.  Although the bank already had significant CDO and mortgage exposure through DRCM, Jenkins beefed up its CDO warehousing unit, where loans were purchased and securitized into CDO's.  The CDO unit decided that securitization didn't provide it with enough risk, so it purchased $50 billion super-senior AAA CDO's to hold as investments.  They were AAA-rated, so really, did anyone need to do any more due diligence?  Besides, the consultant said it was a good idea, so why question it.  Two thirds of UBS's losses in 2007 came from the CDO unit. Not to be outdone, DRCM kicked in several billion in losses once the credit markets crapped out.  Even the cash management unit of the treasury lost $2 billion due to $30 billion in investments in US asset-backed securities.  I used to trade money markets so I know it is extremely difficult to lose that kind of money trading cash management products.  UBS somehow managed to overcome incredible odds to put up these numbers.  Given the magnitude of mismanagement and lack of risk controls, I can't wait to hear the results UBS reports on August 12th.