UBS Pays For Its Subprime Sins With $11.3bn Write-down

Meanwhile, the credit crunch keeps crunching. Another major bank has paid for its sub prime sins with several pounds of equity flesh. “UBS (NYSE:UBS) announced a US$11.3bn write-down and an emergency injection of funds from Singapore and the Middle East that make it as the biggest subprime crisis casualty to date among major European banks.”

Reuters reports. “The world’s largest wealth manager warned shareholders that it was likely to make a full-year loss as it stripped them of their cash dividend,” adds Christine Seib in the Times of London.

The world’s largest wealth manager? The world’s largest wealth-manager is taking an US$11.3 billion write down? You wouldn’t think it’s going to be the world’s largest wealth manager for long, with management like that, would you?

In addition to taking the hefty loss, the company beefed up its capital by selling equity to another sovereign wealth fund. The Government of Singapore Investment Corporation opened its wallet to the Swiss bankers. In exchange for its infusion of capital to shore up the bank’s balance sheet, it takes a 9% equity stake in the company.

There was another, smaller, undisclosed partner to the deal. Wire service reports originally suggested that Oman’s State General Reserve Fund may have taken a 1.5% stake in UBS in exchange for some ready cash. Oman denied the rumour.

Oman’s sovereign wealth fund is only $6 billion, which is rather small compared to some of the other giants that currently bestride the globe searching for distressed assets and tangible assets. Any stake in UBS would be a large investment for such a small fund. But, as Omar Fell from ABN Amro points out, “It’s a developing trend. Asian and Middle Eastern sovereign investors are cash rich and have a longer time horizon than the average market investor.”

When you have time and money on your side, you can afford to be patient. This is what makes debt so devastating. It accelerates time, rushing you into decisions you would not normally make if you had more money. But let’s be clear about what’s happening. Major banks across the planet have squandered capital on un-productive and non-performing loans. To stay solvent, they are selling pieces of themselves to funds that do have money.

The end is result is that the world’s wealth producing assets are being transferred from debtors to creditors. This is the ultimate consequence of too much debt. It results in the transfer of ownership of the things that produce wealth. Debtors don’t accumulate passive income from assets they own. They pay interest and principal to the owners.

It’s quite a turnaround isn’t it? But we were wrong, now that we think about it, to compare the sovereign wealth funds to Shylock. In the Merchant of Venice, Shylock merely holds Antonio to his contractual promise. Shylock charges Antonio interest for his loan of 3,000 ducats. But if Antonio is unable to pay, Shylock can demand a pound of flesh.

Ultimately, Shylock his cheated from his pound of flesh by legal trickery. Contract meant just as little then as it does now, at least when following it becomes inconvenient. Shylock is told he’s entitled to flesh, not blood. He’s told that if he draws blood in extracting his flesh, he’ll be charged with murder. In addition to being cheated of his payment, he’s also forced to convert to Christianity. Nothing goes right for him.

All of which reminds us of what Polonius said to Laertes in Hamlet: “Niether a borrower nor a lender be.”

Back to the markets now. The early news reports from the UBS deal seem cheerful, as if selling equity to extract yourself from a bad investment is a good deal. But the market would like to believe that these steps but the subprime crime firmly behind us. We’re not so sure.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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