UBS Bet $80 Billion of Shareholders’ Money on US Mortgage Securities

And now, we turn to the news from Wall Street.

“It was getting to be pretty obvious, but I appreciate the candor,” says colleague Byron King.

He was referring to a report in the New York Times, in which John Reed, who put together the landmark 1998 merger between Citicorp and Travelers Insurance, called his big deal a “mistake.”

At the time, it looked like a mistake to us too. It’s hard enough to run a small business. Trying to run a finance company on that scale was asking for trouble.

Still, the press was impressed. The NYT:

“At the time of its creation, Citigroup – which combined Citicorp, Mr Reed’s bank, with Mr [Sandy] Weill’s Travelers insurance and brokerage business – was hailed as ushering in a new era in finance by creating a one-stop shop for consumer and corporate customers.

“In a rare interview, Mr Reed said it was unclear whether the company’s model or its management deserved the greater share of blame for its problems. But he said Citigroup turned out to be a “sad story”.

“The specific merger transaction clearly has to be seen to have been a mistake,” Mr Reed said.

“The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.”

The company’s shares have been cut in half over the last year. And it had to raise another $30 billion of share capital, further diluting existing owners.

Who’s to blame? Everything was fine when Mr. Reed left in 2000, he says. Mr. Weill thinks the deal was a great success…noting that the share rose more than Berkshire Hathaway from ’98 to ’02. The business was in better shape than ever when he left in 2003. What went wrong, then, must have happened after that – when Chuck Prince was running things. Mr. Prince, who no longer holds the post, (but still seems to be holding the bag) was replaced by Vikram Pankit in December.

Normally, these old geezers keep their mouths shut. No one would care what they had to say anyway. But these are not normal times. Something is happening on Wall Street and in the City that hasn’t been seen for a long, long time. The finance sector is being de-leveraged. Soon it will be dismembered too.

Finance, as a percentage of total business earnings, went from 10% at the beginning of the boom in ’80 to 40% last year. Whole legions of bright eyed, bushy tailed young people have entered the trade – usually with spiffy degrees from Wharton or Oxbridge or HEC. They are the cogs of this great, globalized polyglot machine. On a recent tour of private banks, we were greeted by a young man of Indian origin who had trained in Canada and now works for Barclays. Another meeting, at HSBC, featured two young women – one of English, the other of African, origin. Over at Pictet, our interlocutor was a Frenchman who has worked in the City for more than 10 years. They all speak the same language, though – a kind of financial Desperanto. Ask them about the Black Scholes Option Pricing model or about rebalancing portfolios to take more advantage of decoupling…or about alpha; you will get roughly the same answer.

During the boom years, putting together these interchangeable parts must have been too tempting to resist. But it has produced some rather ungainly monsters.

UBS, for example. Former CFO Luqman Arnold was forced out of UBS in 2001. Under Marcel Ospel, the bank became one of the biggest employers in the industry, adding a whole range of products and services. But now, Arnold is on the attack, saying the whole thing needs to be reassembled.

The shareholders are up in arms too. In Basel, 6,000 shareholders got together…mostly to complain about what they see as gross negligence on the part of the people running UBS. News reports say they also had it in for the United States of America, whose loose financial mores they think have infected the Swiss financial industry.

“The American El Dorado has become a scene from a Western,” declared one middle-aged shareholder, Therese Klemenz. “UBS was the figurehead of Swiss business. As a good housewife, I know you shouldn’t put all your eggs in one basket. A bank is not a casino.”

Thomas Minder, a local shareholder activist, was even more outraged. “What happened here is a scandal,” he thundered. “You’re responsible for the biggest loss in the history of the Swiss economy. Put an end to the Americanization of the Swiss economy!”

Mr. Minder wasn’t going to leave it at that. He took a run at the podium, perhaps with liquor on his breath and certainly with vengeance on his mind, but was restrained by security guards.

UBS bet $80 billion of shareholders’ money on US mortgage securities. So far, it has lost $37 billion.

UBS shareholders seemed to think that what happened to them should have been illegal. So do a lot of people. And here comes David Komansky, former CEO of Merrill Lynch, with the kind of eye witness testimony we were looking for. Asked what his successor, Stanley O’Neal, had contributed to Merrill’s problems, Komansky said: “What he did to Merrill Lynch was absolutely criminal… The thing I resent about Stan’s tenure is his attempted destruction of the value system and culture that existed at Merrill Lynch.”

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

1 Comment on "UBS Bet $80 Billion of Shareholders’ Money on US Mortgage Securities"

Notify of
Sort by:   newest | oldest | most voted

This is the first loss by UBS in 150 years.
The sub-prime disaster has still some way to run though.
If what we read is correct there is still $500 Billion in sub prime debt to be reset this year.

I was told yesterday that the American Government was planning to bulldoze thousands of empty houses!!!!!! The theory is that if thousands of houses are left empty they will be filled by squatters and become ghettos.

Can they (the Government)do that??

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to