"UBS goes cap in hand to wealth funds" -
Citigroup was forced to turn to Abu Dhabi to bolster its capital position. Now UBS has had to go cap in hand to the sovereign wealth funds of Singapore and Oman to shore up the balance sheet. It is surely only a matter of time before some once-proud American or European bank turns to the Chinese for assistance.
As Western bankers sink amid a sea of sub-prime lending write-offs, the need to turn to Asia and the Middle East for new capital seems both desperate and powerfully symbolic of the shifting power equation from developed to developing world.
Even a few years back, no Western banker in his right mind would willingly invite such investors on to the share register. It would have seemed somehow disreputable to do so. Yet there is nothing like necessity to humble misplaced pride.
In today’s world, the “haves” and the “have nots” are being bizarrely reversed, with the prosperous West never more dependent on the vast capital surpluses of Asia and the Middle East to keep the wheels of economic progress turning. Where once Western bankers would sniffily have shown the sovereign wealth funds of the developing world the door – except as fee-paying clients, of course – today they are only too pleased to welcome them in.
With UBS, the dilemma would have been a double excruciating one. Swiss bankers are valued for their discretion and their innate conservatism. The losses sustained by UBS on collateralised debt obligations (CDOs) have dealt a devastating blow to the bank’s reputation for the latter. Little more than two months after expressing confidence about full-year profits, UBS has been forced to admit to another $10bn of write-offs, wiping out fourth-quarter profits and likely pushing the bank into losses for the year as a whole.
The often-secretive super-rich use Swiss bankers because they are, well, Swiss. They don’t expect to wake up one morning and read that the custodians of their money have been forced to shore up the balance sheet with Asian and Middle Eastern dollars. Whatever happened to all that Nazi gold, the orphaned billions, which by repute at least sustained the health of the Swiss banking system? Sunk in American trailer parks seem to be about the sum of it.
Yet the alternative to seeking these new sources of capital would have been much worse. Following the capital increase, UBS will have tier-1 capital of 12 per cent, which is 2 percentage points above its target ratio and quite a lot more than it really needs. Failure to take such action would on the other hand have exposed the group’s private banking franchise to the possibility of mass withdrawals. As it is, UBS will struggle to maintain healthy levels of inflow. Swiss banking, it appears, is not quite as safe as wealthy depositors once assumed.
Existing shareholders meanwhile suffer an 18 per cent dilution, and, as evidence of quite how desperate UBS must have been, it has to pay a 9 per cent coupon on the great bulk of the new money until conversion of the loan stock into equity. This is admittedly less than the 11 per cent Citigroup was forced to pay, but it is still a deeply humiliating rate for a bank of such once-rock-solid standing.
Some of the necessary management cull at UBS has already largely occurred. The responsible chief executive, Peter Wuffli, is history, and, though the chairman, Marcel Ospel, continues for the time being to cling stubbornly to the wreckage, we can only assume that he too will shortly be on his way. What’s more, by writing off as much as $10bn, UBS claims to have taken the extreme view of the value of these securities that is reflected in current market prices.
It seems likely that ultimately they will be worth rather more. Marcel Rohner, the new chief executive, says that by being so pessimistic he hopes to create “maximum clarity” on the issue of sub-prime losses and thereby substantially eliminate speculation as to whether they were being adequately reflected in write-downs. He’ll just have to pray he is right. Mr Rohner used to be in charge of private banking and was therefore not directly responsible for the calamity, which has befallen UBS. Yet he is still part of the old guard, and he too would be vulnerable if the latest clearing of the decks again proved insufficient.
Once upon a time, Swiss bankers were renowned for their privacy and competence. Then they discovered the delights of Wall Street investment banking, collateralised debt obligations and all those other weird and wonderful inventions of the global credit markets. They should have stuck to cuckoo clocks.
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