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The management of UBS and Citigroup has only themselves to blame for the mess they get themselves into. In the pursuit of higher profits and increased earnings, they have put aside their common sense, and loaned billions of dollars to people with poor credit records. What happened to all the risk management and diversification that was learnt in college and business school?

Just when we thought these huge "mega banks", a combination of commercial banks and investment banks were the way forward, we have learn a valuable lesson. One should just stick to what one is good at. Investment banks should be investments banks, commercial banks should be commercial banks. Just look at Goldman Sachs and Standard Chartered, they are doing fine.

Interesting timing before their bonuses are announced ... no doubt preparing UBS staff for the worst?!

Let's be frank - you have to be pretty incompetent to sustain losses on this scale.

I think it is time to create a professional body to represent all these people. I suggest the snappy acronym 'TIFI' - The Institute of Financial Idiots.

We just are having an action replay of the American Savings and Loans crisis, where they lent too much to risky ventures and lost money hand over fist.

But we can never avoid repeating history – people will always try to make a few quid. All we can do is make those who take the risks suffer the most when it goes wrong, and give those who take the least risks some upside.

So let’s be hard on the spivs and wide boys who have infested some banks - and three cheers for the TSB for steering clear of that toxic stuff!

Another day, another international bank tells us "you know when we said we had little or no sub-prime exposure, well..." So it turns out that Swiss bankers are no better at sums than the geordies, perhaps UBS is beginning to regret outsourcing its I.T. to a small outlet on Tottenham Court Road! Come to think of it, they may reasonably expect a discount on some of that expensive risk management software that vendors sold them. Anyone involved in banking must see this as a shocker - UBSpaying 9% for 2 years and fixing a guaranteed minimum conversion price of 100% plus also talking about converting its dividend to stock. And yet the share price goes up! Investors are clearly drinking too much, mind you UBS told them that it was really a wealth management business and they believed them. All they had to do was to google "biggest trading room in the world" to see pictures of UBS's casino in Conneticut, home of the hedge funds.

What I want to know is how is how is the Bush/Paulson plan to avoid resetting mortgage rates going to play out. Is it just to get the rating agencies of the hook so they can say, of course this invalidates our previous AAA rating" after all the last thing the US needs now is the agencies downgrading a municipality or quasi-federal agency right now. It is odd how things work out, I mean if you miss your payments to a Moscow money lender you will find yourself floating upside down in the Moskva River but in socialist USA if you can demonstrate you are a good citizen and really, really would like to pay your mortgage, kindly old Hank Paulson, (former CEO of that well known charitable organisation Goldman Sachs), will go all it's a wonderful life on us. And how much longer before those terrible capitalists in Beijing take the USA to task for propping up their decrepit banking system and driving down the value of the dollar?

This is really a request for clarification from the more enlightened among you.

Is UBS's problem really comparable to that of Northern Rock - i.e. do UBS also have a liquidity issue?

If so, why what is different about UBS that the Singapore government coming rushing to their financial rescue?

Also, if the issue is one of raising short-term capital, what effect is this rescue of UBS likely to have on the UK LIBOR?

Thanks.

No doubt many readers accustomed to burying their heads in the sand will be wishing Robert Peston would take a prolonged sabbatical and stop reporting on these financial horror stories. But I would encourage Robert to keep up the good work. I have been taking a defensive financial position ever since I took on a 10 year mortgage 18 months back. Lord knows where the Footsie and the housing market will be this time next year but prepare for a very bumpy ride.

Just a small but perhaps not insignificant question for Robert. In reletion to the multi-$Bn sub-prime write-offs by the major banks, I have seen little or no reference to the possibility of fraud on a grand scale. With the facility of obtaining loans with no collateral or little pressure to pay them back, I would be surprised if organised crime in the US had not been aware of the opportunity of a quick buck. I really have difficulty in getting my head round mere incompetence. The sums involved are simply too large.

Robert said: "After all, this is a bank whose great claim has always been that it is more conservative than its rivals."

This is such a telling statement, Robert.

I think it's indicative of our High Street banks also. Losses are being concealed by the likes of Barc, RBS, HSBC and Lloyds TSB, allowing NR to continue as the 'of-the-moment' scape-goat.

Time will tell. I expect great changes in 2008. Merry Xmas everyone!

I don't know how much you know Robert, but I read elsewhere that the explanation for the apparently high interest rate Citi is paying is because it is equivalent to dividend payments post tax....not because they are junk.

Can you get back to us on this important point?

Good incisive article as usual. There is no doubt that many banks, including several high profile UK institutions, are in serious denial over the scale of their exposure to dodgy SIVs, CDOs, Subprime mortgage and general bad debt positions etc. The losses that have been anounced so far are a mere appentiser for what will be revealed next year! Much more transparency and honesty about 'off balance sheet' accounting ought to be one result of this on-going financial fiasco.

As each CEO is purged, the new one will conduct a thorough review and attempt to write off as much as possible to show how bad the situation is and then aim to show how much of a turnaround has been accomplished under new management. If the CEO isn't ousted, then they will attempt to conceal the damage for as long as possible in the hope that market conditions turn round.

Unfortunately this is entirely predictable when you look at how senior teams are rewarded. If there was true downside risk to their behaviour i.e. no large payoffs and no subsequent move to an equally lucrative role somewhere else, then they would be far more careful. But the lure of huge bonuses drives them to jump on any bandwagon which offers immediate financial return irrespective of any long term consequences. If it goes wrong, it's for everyone else further down the food chain to pick up the pieces afterwards.

Another sign of the coming collapse in Western living standards relative to the rest of the world.

Northern Rock was saved by the Treasury, USB by the Government of Singapore. It is interesting that when big bankers run into trouble their saviours have to be governments - which at any other time they decry as interfering with the free exercise of their entrepreneurial skills.

This story and all the others associated with this entire debacle has really undermined the credibility of the financial institutions. It's difficult to see how they can be trusted again.

Explain me what difference would a .25% or even 1.00% bank rate cut would do. when these big banks with bargaining power are taking money at 11%.

If they are getting at 11% they need to give it to you at 11.5% atleast to cover cost.

Is BOE bank rate of any use?

This is only the start of the secnod round of admissions. The large majority of Investment Banks are in worrying situations but if they all came 100% clean at the same time it would destroy the markets and probably colapse the markets.

They are going to continue to make these admissions of several billon at a time for the next 12 months, by which time the total losses for the banking industry will be in the trillions.

This is just the start of a global recession that will be felt across the world. The US is leading the way and they may never recover from this. with only 300 million people compared with 1 billion + in India and China and 750+ million in Europe, why should they be considered as the only world Superpower.

The rest of the world will realise that the US overspending and greed has dragged everyone into this mess (although Western Europe has done more than its fair share as well) and therefore they will be focusing on building their own markets instead of letting the US dictate what happens.

There will be a lot more of these losses from other banks.
The biggest worry is the Monoline Insurers.

I think Robert Preston is doing the ordinary people of this country a great service in reminding them that this financial debacle is definitely not over yet and we should all put our pension funds, etc. into something that will be there tomorrow.

Modern anglo saxon economies are driven by consumerisium, which is heavely taxed and therfore vital to government. All fine when your economey produces the goods for your market, but when the profit or added value is sent out of your economey the wealth and eventualy power and contriol goes too.
Those with the assets, fuel and cheap labour will rise and rise.
The credit crunch and housing inflation are symptoms of these facts combined.
Those who took the risks with other peoples money pocket a huge bonus every year and of course dont pay it back when it all goes belly up next year, and who can blame them. They were incorradged by a bonus to admire the emporas clothes.
There is a new world order over the horizon, we had better learn to adjust and manage our expectations.

Re Andy # 5:
"Is UBS's problem really comparable to that of Northern Rock - i.e. do UBS also have a liquidity issue?"

To be rather simplistic, it is essentially two sides of the same coin. The likes of Northern Rock aggressively brokered loans to individuals whose ability to repay was questionable - 'brokered' being the operative expression, as the risk of default was passed on to the actual investors who bought the loans (i.e. lent the money), of which UBS (and their clients) were one.

When the instances of default (or higher potential to default in NR's case) went up, the investors/lenders stopped lending, thus cutting off NR's ability to carry out business, panicking depositors, and destroying their capital adequacy ratios.

Meanwhile, the value of the investors loans have fallen (quite to what level no-one really knows), and it is the recognition of this which is impacting UBS.

The investment from the Government of Singapore is just that - an investment in return for equity, not a government bailout. This is because UBS needs funds to maintain regulatory capital levels (the alternative being to shrink their balance sheet by stopping lending). It is similar to NR, but not as extreme - nearly all banks globally are suffering some form of asset writedowns. How big these are relative to their overall asset base, and how aggressively they managed their capital (i.e. how close they were to capital adequacy requirements) determines how desperate they are in raising new capital.

Re LIBOR rates, the premium is unlikely to go away until banks really get to an equilibrium level of asset writedowns which is likely to take many months, particularly as the underlying asset values are likely to deteriorate further.

Robert says that we will all feel poorer, well I beg to differ. Not everyone is up to their eyeballs in debt and not everyone lives on credit.Over the years all these people loading up on debt buying big houses and expensive cars made us savers feel poorer, well now the table is turning.The only thing making me feel poorer now is rocketing "real" inflation.

Robert on a related subject, let's see some analysis of losses in pension funds. We have heard very little and I fear it these are the pots where a lot of the toxic waste is stashed.

UBS is using a much more drastic write down ratio for CDO's (writing down more as a percentage of it's CDO value it's holding).

This is the problem we have in the UK particularly with the RBS figures they are best case scenario write downs rather than UBS which is a worse case scenario. I rather fancy that the paying of tax of profits might well be more important here.

Hey doomsday scenario..a really big bank breaks even in a really bad year...and refinances its balance sheet to protect its credit rating, yes expensively, but does it not convert to equity in 2 years time...It sounds that Robert only has one mode...doom...

Robert, the gap may 'just' be £1 billion to £2 billion but that is only because we lag the States in our residential property meltdown by 18 months or so.

Like the last UK residential boom this one was sparked in Central London and fanned west along the Thames (back in 1995 there was a Sunday Times story flagging this up) before rippling across the country. When the least attractive towns in Scotland boom (as now),the London bust invariably runs in tandem.

Back in 1988 I remember vividly going out with friends in New York City for a drink. It was 8.8.88 and we spent the first part of the evening in a bar called 88s. And yes I remember when my watch told me it was 8 minutes and 8 seconds past 8pm, because it was announced by the piano bar host.

What I also vividly remember from that evening out is that my NYC dwelling friend was drowning his sorrows as he had found himself the proud owner of not one but three unsellable homes due to the collapsing real estate market. (Lime tick was an additional factor for the week-end retreat upstate but I digress).

The collective mood in the room that evening was terrible. Clearly many others were equally depressed that their paper wealth had suddently evaporated.

Back in the UK I clearly remember that the incredibly tight London residential market ( and accompanying euphoria)was still running in the summer of 1990, but it had collapsed by the Autumn.

We are now finally re-visiting the autumn of 1990. And that's before all those City workers get their P45 for Christmas as opposed to the traditional nice big bonus.

In short the £1 - £2 billion figure of rescue finance is already historic. And Mr Darling should not be allowed to dither further. The bank needs to be nationalised. And now.

Sometimes deja vu just needs to be factored in because it is clear that this time our fate will be even worse. I predict ten years before the market finally bottoms out and getting on for 2030 before the market gets back to its long term postwar trend line.

Didn't Marcel Rohner (now CEO) used to be the CRO of the Bank? He didn't do so well there it seems...

I think they have played it smart by being fully open and transparent about their exposures. The rest of the industry is being very conservative in their disclosures and the full extent of the losses have yet to be seen elsewhere.

Their shares (UBSN) are a massive BUY at these levels.

I have worked for UBS Investment Bank for the last ten years and got made redundant a month ago in the last round of cuts. I was always so proud of working for such a highly regarded swiss bank and worked very hard with excellent reviews in the last ten years. A lot of the people they have made redundant in the last two months are really good people. The savings they will have made in the last round of job cuts will be minimal, but seen to be a positive move to shareholders to show that they are cutting costs. The UBS IB has made not only bad investment decisions in the last 2 years, but also cut staff to such an extent that they are now running on empty in terms of servicing clients. It makes me angry that you a bank of this scale can treat its employees badly and also cover up problems to clients as well. With the annoucement today, I think I may just have had a lucky escape. Such problems are always covered up for as long as they can be and when they are finally announced, people are shocked. But it happens every day and is happening at all the large IB's across the city.

UBS is a great bank and it takes a lot of guts to do what they have done.
You have to reckon that they have chosen to wipe the slate clean, rather than drip feed shareholders each quarter for years to come.
For sure Merrill Lynch appears to have adopted the same approach which only goes to show why they will always be world class banks and ours pretend to be.
Yes the losses are horrific but do we want bankers who would't know how to tell the truth even if it hit them in the face solely to protect their bonuses or do we need some long forgotten humility.
Let us also not forget that so far only the banks to date have adopted to volunteer any damage to their bottom line, but what about the Insurance companies who no doubt bought buckets of these products over the years. Are we to see them pretend they have not been touched as well? It just would not be credible or honest.
Od course if we had a Regulator in place that was on top of the situation then perhaps the above comments would not be necessary unfortunately the FSA has lost so much credibility, from Endowment policies, Payment Protection and Critical illness policy fiasco's not forgeting Northern Rock that a total change of approach needs to happen.
The fact that the FSA is now turning to a principle based regime, which given that its earlier gilt edged approach was totally ineffective looks an even more dumb idea.
Its powers were confirmed by the Labour Government with primarily Gordon Brown agreeing what it could and could not do.
His now being Prime Minister and having to suffer the the obsessive controls which all reverted to H M Treasury serve him nor the Country any use what so ever. Particulatly given the present Chancellor has never made a decision in his life.
What can we do to return to normal service?
1) The FSA must be staffed by personnel who have worked in finance and understand the mandate fully.
2) Its Chair must resign, without compensation, immediately as he has been party to the indecision that is costing every UK citizen dearly.
3)Rules must be put in place that are not theroetical but understood by employees of banks, insurance companies and the public alike, in easy to interpret english not legalese. clap trap.
4) The Bank of England must have its original powers of control over the banking system fully returned but not so that the old boys masonic network is allowed to prevail.
5) The Chancellor should resign for "family reasons" and finally
6) By February at the latest the Prime Minister should call an election.
We can mot pretend that this mess will just fade away with spin deverting attention, it has been building up for years and better to have the short sharp shock treatment than pretend it is only a nominal aberration,. It isn't this is deadly serious and needs folk in charge who can get things done not sychophantic grovellors who havent't a clue.
There is a new economic order developing and our ways of addressing matters used in the past are not only hopelessly inadequate but are causing us greater problems. Yes the party may be over but if we have the right people handling events then we can return to an adjusted basis within a year.
I may be a Brit but the when it comes to financial disciplines the USA is leaps and bounds ahead of us and our European counterparts.
We need to realise they for their sins in soem areas are still teh greatest country on earth and will lead the way out of this, accepting they created it. We need work to their standards to get it sorted.
As always when the USA gets a cold we all catch a chill and the sooner we understand that the better.
Only then will we be able to move forward and retrun our systems to near normal.
God Bless the Queen, but also thank God for America.

It would be interesting to discover exactly where UBS 'lost' the funds. I suspect that hedge funds again through the deingredientization of mortgages have taken a hammering. One of the stranger aspects of teh current liquidity crisis is that when teh books are written over he comng year, there will be almost universal hindsight agreement that the signs were writing was on the wall well and truly so many months/years ago, etc. As usual the most aggressive hedge funds that tumbled in the first two quarter of this year will be taken as bell wethers of the affair - history repeating itself ala LTCM. Irony of ironies UBS and Merrill going ca in hand to old clients whose money they once managed.

"...if there is a price paid specifically by UBS and its shareholders, we are also all paying for the foolishness of that bank and its peers"

Mmmm. I don't suppose you'ld care to elaborate on what you mean by "and its peers"? Nor perhaps to give your candid opinion as to how widespread this "foolishness" may be?

Your evident stance is that this is a localised problem; large, certainly, but not something that should be seen other than as the misjudgement of a rogue minority. What proportion of you actually believes this to be true, and what proportion just hopes, desperately hopes, that it is?

It is easy to throw stones.
It's much better to use the space to try to understand what is going on.

A lot of the investment banks were driven over the last 3-5 years to generate more revenues to outdo their competitors. Why? Because shareholders and the market expects them to do that.

There is no free money. This generation of wealth comes with risk. There is always a non-zero probability of a crash risk. You cannot blame an institution that exists solely to make money for taking risks.

The current situation is extraordinary in that a significant proportion of assets previously assessed to be reasonably safe is effectively not tradeable in the market. To imagine what is going on now, try to think what will happen to the personal wealth of home owners in Kensington if we discovered that the whole area is immediately zoned to be unstable for habitable due to damage caused by leaking water pipes. You can laugh and point your fingers, but it could happen to you. The difference between these large investment banks and NR is that UBS has a lot of other assets and businesses and that this loss is a hit in profitability and it needs some liquidity to conduct business. NR's problem is akin to having taken out a huge mortgage on a house that has been condemned.

BTW, I am currently NOT an employee of UBS.

Let's face it - the shift in power from West to East is now a reality.

Our thirst for oil and cheaper goods has shifted the balance to the Middle-East, China and Russia.

Without the funds from these areas of the world the Western banking system may have been on the point of collapse.

Interesting to see that the usual suspects claiming the Mr Peston is casuing the breakdown of financial institutions by his reporting are absent so far from this blog.

Perhaps they have fimnally realised that the management of Northern Rock, UBS, Citi etc are responsible for causing these events and that the reality of the situation can't be changed by hiding the facts.

Robert Peston ,like his fellow financial journalists ,is revelling in the current financial problems of the banks. He describes it as an 'inferno' and says 'we will all feel poorer'.
Houses will be cheaper , mortgage rates will go down - how will that make people poorer?
He forgets the economic fundamentals for the U.K. - historically low inflation, low unemployment ,low interest rates, annual growth - all of which look set to continue!
Banks have made mistakes and are acting to correct those mistakes .
Not big news really!

Harry e.

The point about the interest payment from Citi being equivalent to divdends less tax, and not junk, is a little confused.

The point about equity is that you have a stake in the business you invest in. It goes wrong, you lose your money. Everyone else has their share of the pie, and you get left with the crumbs. And if there's more than crumbs left, then generally everyone won't have tried to grab their bit of the pie.

The point about debt is that you do not have a stake in the business you lend to. You can ask for your money back according to the terms of the loan, and if everything falls down, you generally have better rights than most other people with a stake in the business, especially if you have security. Generally, you will flex the terms of your loan according to the perceived risk on the loan (although banks have been a lot lapse in doing this over the last 10 years, hence the current problems).

Therefore, by demanding an interest rate of 11%. it would appear that ADIA are assessing the risk of the deal turning sour as very high, or the security on the financing as very poor. Added to that is the fact that Citi can repay not in cash, but in Citi Shares. Historically, this would have pulled the rate down as the share conversion would usually have been on preferential terms for the investor. So either Citi is in more trouble than anyone thinks, or conversion is a benefit to borrower, and not lender. Not a pleasant thought.

Mr. Peston: While i admire your courage and continuing coverage of what is one of the biggest issues to hit the capital markets world for many many years, maybe it would be useful to your readers if you explained the regulatory capital requirements under Basel II and how increasing LTV ratios are another disaster waiting to happen, as a result of the credit markets freezing.

The banks are risking having so much regulatory capital, that they are starving of working capital - and I suspect that is the real motive behind UBS and Citi's moves and I suspect the reason for the supposed low valuation put on Northern Rock, despite its sizeable assets.

At one stage the garden of the Palace in Tokyo was valued at more than the entire Stae of California since when the banks in Japan seem to have variously dealt with 'losses' though I don't remember eactly where we are now and if all Japanese banks have clean balance sheets from those heady days.

I suspect that every quarter for the next two to three years banks will be writing off mortgages and related securities. Plus we then have the meltdown in the Private Equity game in prospect as economies slow so do the profitability sums driving many of these deals.

If I were a bank I'd be looking also to shore up my Tier 1 capital, in fact I'd be looking very carefully at all sorts of ways of acquiring extra capital including a rights issues. One can reminise of the good old days when bank stocks were part paid...that is the stock holder had unlimited liability...like 'at Lloyds'.

Risk is going to become a major question for depositors and small exposed banks like Northern Rock should be avoided until interest rates are significantly higher. Halifax are charging c.27% (?) on a new credit card for less satisfactory customers.

My current worry following the FSA's 'cock-up' over NR which is a really simple mortgage bank what sort of omelette they will make over insurance companies which are slightly more difficult for the average analyst to model and bearing in mind Equitable Life (a GAD failure)and others more particularly now that management of books of annuities are bought and sold, no doubt with some buyers looking to stuff them with some toxic structured debt and remove some capital.....

Then there are those insurance companies that do mortgage payment insurance and one wonders how many have mortgage derived structured debt as part of their investment pools.

Sure we want banks to take risks ,that's why we buy their shares and why we get new start up's etc with enough juice to make a go of it.
BUT and make this a big BUT, given the huge reward packages on offer we'd equally appreciate it if they actually knew WHAT the scale of risk was that they did take. If not would these gentlemen either agree to a more modest remuneration package ,or would they agree to share in the losses to the same degree they share in the rewards ?
It doesn't take any real skill to keep doubling up your bet's and pocket your good luck if it wins, when if it loses you still win.Think non returnable rewards .However , no one ,but an idiot would think this was sound risk management.
Point made I think and I wouldn't "reckon" ,or think ,secondguess ,or anything else that we had heard all the bad news at this point.
I really see no reason why awful risks taken in one area (sub prime lending securitised packages) wouldn't have been made in other areas of business. I'd be happy if someone could tell me why they think that may not be the case.

Comment 33 : TW

"A lot of the investment banks were driven over the last 3-5 years to generate more revenues to outdo their competitors. Why? Because shareholders and the market expects them to do that"

Exactly.

I really don't think anyone is thinking that the entire financial community is a bunch of nincompoops that has, without exception, come to the conclusion that moonbeams can be made out of cucumbers. But we surely have a problem when a few people establishing this as a belief can make it impossible for anyone in the rest of the market to continue to operate in reality. Don't we?

So, as part of the corrective process we'd be well advised to explore very thoroughly how we might best create structures that prevent any future nincompoopery, innocent or malignant, from gaining a foothold.

I'd suggest we start by discouraging with a vengeance the deviousness that is the main ingredient of its construction.

Mr Peston, Northern Rock barely even rated a mention in this piece! Surely you could have worked in how bad things are looking for it, that there's very little certainty of a bid, that it's on the verge of collapse, that all its real assets have actually been swallowed up by a rift in the space-time continuum, etc, etc.

8-)

Does UBS need capital? if it didn't it wouldn't be paying such a high rate of interest and diluting its equity to such an extent. Citi is clearly in a worse state. All of the major banks are hoping that this problem goes away before they have to admit the true extent of their losses. That is why the increased liquidity being offered by the Fed and the ECB is so important and the dodgy loans from the BOE. Already the US market is calling for the Fed to cut rated by just 25bp rather than 50, (which smacks of panic), but to widen the discount window...why not, the important thing is to adjust the collateral they will accept. It is only a matter of time before they let the banks post Argentine defaulted debt and any old GKO's they may having lying around as collateral. Anything just to keep the banks liquid! I worked at a bank that hired a team of ex-UBS CDO managers, they set up the program, took huge bonuses, (one guy got over $20mn apparantly) and left to work their magic at another financial institution, I wouldn't feel too sorry for these guys if I were you. Personally, I can't wait to see how much of this junk emerges on the balance sheets of the foolish Japanese banks. Meanwhile spare a thought for the teachers in some county in Florida that didn't get paid last week because of the sub-prime assets that Florida state had invested in or check out the bankruptcy of Norwegian regional investment bank Terra Securities which purchased sub-prime assets from Citibank. turns out 4 of the regions that owned the company have had to cut back child health care programs as a result. If any of these problems hit the UK pension industry, I wonder how many people will still be behind the support of Northern Rock.

Really, Northern Rock should have failed weeks ago. It should be allowed to fail now.

It seems that failure is simply not an option...

Interesting... In that case we're going to see interest rates tumble much further to prop up the banks. We're all going to see another boom just to keep everything rolling.

Comment 41

Quite so.

On reflection I think the most interesting issues coming out of this are
- how do we get out of this mess as painlessly as possible (ie without a Japanese-style 10-year recession).
- how do we stop it happening again.

On the former point, should the government be actively looking at the best way to bring house/asset prices back down to a sane equilibrium level (maybe 50%)? Would this automatically mean a significant shrinkage of the banking/financial sector, a serious drop in the exchange rate and a return to doing some real work (eg manufacturing) for the country to make a living? Actually, mayvbe that wouldn't be a bad thing. But if so it needs to be carefully planned.

On the latter point, I do wonder if these CDOs, off balance sheet SIVs, etc are just so much against the public interest (in terms of non-transparency and just sheer capability of damaging the economy) that they should be made illegal, or at least taxed out of existance. Anyone know if such legislation would be feasible?

What we have here is fraud on a massive scale, this is ENRON revisited. Banks were selling debt several times over in hopes to cash in on the rising rates as the ARM's matured. The fact is that the banks printed the funds out of thin air (ref: The Credit River Decision 1968 Mn, US). While all the time the debt was secured by real assets paid for by hard working people all over the US and Europe. The losses represent a fraud on a truly massive scale, we the people are the big losers.

The banks will write-off the fiction paper losses on their taxes. The entire situation is engineered by the banks for their gain. They win no matter which way it goes, get used to it, or change it, but do not blame the poor people trying to have shelter over their heads and make ends meet every day.

If these banks were not to chase these bumper profits, i am sure everyones pension funds would of been complaining that the banks were not doing the best with the opportunity... alling for the heads of the CEOs and asking many a question...

The banks have to aggresively push for profits to pay for pensions and create money for everyones savings...

Not all banks are incompitent and not all banks will reveal huge sub prime losses!

post no 45
Should all this off-shore trickery be made illeagle or taxed out of existance. Interesting thought, post 30 is bound to disagree with that idea. After the Enron incident, our friends in the US introduced something called Sarbanes-Oxley, an act that would increase regulation and ensure similar incidents such as their use of off-shore, off balance sheet companies should never happen again. In recent years Wall Street has decried this act saying that the expense and excessive regulation caused companies to list in London and other financial centres rather than the US. If you look closely at thes SIV's and CDO issuers linked to those same Wall Street Firms, you will see how similar they are to the Enron special purpose entities. You should never underestimate the greed and stupidity of the banking community.

"45. steve wrote:"
how do we get out of this mess as painlessly as possible (ie without a Japanese-style 10-year recession).

We don't. You either inflate, you remain static or you deflate. Those are the choices.

We have been inflating at 10%+ for 10 years. If you want house prices to drop by 50% we have to deflate for several years. I'd guess 5 or so, depending on exactly how drastic you want it.

You want to know the real solution to the 300 year boom bust Ponzi scheme we're all mired in? Full Reserve Banking. No built in inflation, no built in deflation.

Make it illegal for interest to be paid on money which is available on demand. This would spell the end of the fractional reserve banking system which is causing all the problems.

Please learn how money works. Perhaps we'd elect fewer idiots.

Comment 45

Steve, thanks for your support. I agree with your identification of the 2 main issues:-

1. How do we get out of the mess as painlessly as possible

2. How do we prevent re-occurrence

I think what we also have to do is to confirm that we are actually in a mess. That we are not just overreacting to a local difficulty that is made unmanageable by the reaction, not the real scale of the problem.

All financial structures rely on maintained confidence - is what we've got worthy of our confidence, or is it in need of radical surgery before it should feel entitled to regain it?

The second point is that it is important when seeking to prevent re-occurrence to be careful not to emasculate the creativity of the financial sector. I'd be quite easily persuaded, for example, that risk-spreading through derivatives etc. is a real advance that has benefited society, and that it is abuse of this part of the system, not the structure itself, that is the reason behind some of our problems. We need to ensure that we don't hamper genuine innovation with our drive to eradicate trickery.

Of course, I think like this because I'm at the autistic end of the spectrum. I'm often accused of being unappreciative of the contribution trickery and deviousness make to social progress. It's put to me that honesty and straightness are autistic traits that are inferior to the natural deviousness of the neuro-typical mind. And that therefore a world built on honesty and straightness would be a much poorer place than the one we currently inhabit. Although I don't actually believe this to be true, I recognise that it could be, and I'd be interested to hear any neuro-typical comment on this matter.

This is probably the end of the "originate and distribute" debt model of investment banking. Some of the largest US Investment banks are really insolvent but will try and trickle their Tier 3 debts onto the market gradually. I suspect that the equity markets will collapse in 2008 similar in magnitude to the 1973/74 or the Japanese equity disaster post 1989.
These investment banks will have to sell their portfolio investments so as to maintain their capiral adequacy ratios

If the British Government nationalise Northern Rock that would impact on their own financing. In adopting NR's liabilities it would increase the amount owed by the Government and, under their inadequate accounting records, this comes out as money spent.

That would be going in the opposite direction to Brown's beloved PFIs that allowed him to undertake capital expenditure that did not impinge on his borrowing requirements - did not show as spent.

By adding the £30bn plus needed for NR to a planned overspend of £42bn this year, Darling would all but sink his own budget.

Also, are we so sure of the value of NR's £100bn of mortgages. I understand that in the first half of this year NR was pushing 125% loan-to-value mortgages very hard, to the point that, for a while, it was the leading new mortgage lender. 125% mortgages start life as an asset that is 25% over-valued, and that's before any drop in house values.

No, don't touch it with a barge-pole, please.

I question the wisdom of goverments lowering interest rates to bale out large investment banks that have incurred large write down losses due to reckless lending on their part.

I also question the words of wisdom expressed by Anatole Kaletsky when he says "the Fed in times of crisis or stress transforms itself from an economic think tank into a supremely pragmatic institution with clear and unambiguous priorities: to avoid unecessary recesstion and to bring any crisis of confidence in the financial markets quickly under control"

WHY!
Because recent events have shown that the business/economic model that drives these markets contains too many flaws and many of the grossly overpaid gurus running these organisations are equally flawed or just not competent to run them properly.

Recent and similar past events (we've been here before) suggests that something not quite right is going on within these organisations and the money markets. Therefore to cut interest rates in order to keep them afloat is akin to applying a sticking plaster to the Titanic after it was holed.

The problem of doggy dealings in CDO'S and such like was questioned more than a decade ago and since then it has got progressively worse and has now reached the point where it is now totally out of control. No one knows for certain where the existing holes never mind where the next ones might appear.

Against this background and before cutting rates any further it would be prudent if all the parties involved would step back and take account of some of the problems besetting these markets. Not just listent to the siren voices coming out of the city and financial markets. These are the people who got themselves into this unholy mess in the first place.

Problems

* Recent events have shown that the business model they are using does not have sufficient checks and balances of the downside risks associated with reckeless lending practices.

* Although it is generally agreed that the US sub-prime mortgage problem precipitated the present finacial markets turmoil the risky investment malaise gose much deeper and wider than this and other areas might come to haunt them in the future.

* The fact that none of the grossly overpaid financial gurus running these organisations knows what the true extent of the doggy lending problem is (even within their own organisations) suggests they lacked either the will or the necessary business skills to ensure these were being soundly managed.

* The culture of irrational behaviour and reckless lending is now institutionalised within these organisations and one strongly suspects there is a correlation between this and the huge payouts that individuals can achieve by carefully disregarding certain aspects of management control or by incorporating dubious accounting practices simply in order to overstate the performance figures.

* Thesee reckless mal-practices should have been banned years ago by those responsible for ensuring the banks were being properly run instead they seemed to have condoned this behaviour and are still gettig away with it.

To#45

An adjustment in property values is unlikely to be planned. The government does not want those values to fall, as with them so to will fall consumer confidence... consumer spending etc etc. Property values will fall however. Due to a lack of affordability and because fewer people will/are be able to get a morgage with which to buy. Suddenly far fewer people meet the banks' lending criteria or simply just don't have the huge up front arrangement fees now being asked. In 18 months/2 years we will be able to say that they either didn't fall enough or fell too much. Either way, they were not planned.

#44 is right. Without the £25billion (and rising)from the BoE, NR would be unable to continue trading.... is that not the very definition of insolvancy?

As for your second point, any regulation regarding this will be of a voluntary nature. It will be quietly ignored as too much of an inconvenience to the business of making money.

There is a lot of arguing over UBS and why it is doing this. There would appear to be a number fo factors at play some or all of which will have weighed on their decisions.

The various posts re UBS and its clients having picked up a lot of the sub prime securities are true. As are the statements that banks like UBS, Bear Stearns and Citi and brokers like Merrill Lynch have made a lot of money over the last few years on all of these financial instruments and now when they have gone wrong they have lost a lot of money.

Let no one be in any doubt there is always risk in financial investments. These ivestments made good money in the good days and they will come back to haunt the companies left holding them now. Before anyone thinks this is not a widespread problem look at the problems with Sachsen Landesbank in Germany as well as with various French banks.

The Singapore investment may be seen one of two ways.

Firstly UBS is in real trouble and depserately needs the money. In my mind unlikely but possible.

Secondly UBS needed to raise capital and Singapore wanted a large enough stake to gain some leverage over the business of UBS. Both have achieved that. The quality of capital raised may well mean that when all of this money merry go round comes to a halt UBS will be able to pick up some good quality assets at a very low price and thus justify this apparent high rate of cost.

Put simply it makes sense to pay 11% if you expect to get 20% back.

UBS are likely to be one of the few companies that will have money left to pick up good assets in the inevitable fire sale sometime in 2008.

To be honest none of us really know what it is for certain. It may be a desperate act from a company in trouble i.e scenario 1 or an inspired act scenario 2 if it gives Singapore the option to purchase further shares. They stand to share in profits in the future when there will be a lot of assets up for sale with few buyers.

There is a lot of confusion in this thread!
1. UBS does not lend for mortgages (sub prime or otherwise) in the USA. Rather it bought and dealt in packages of such mortgages on-sold by the institutions that do.
2. Northern Rock does not lend to sub prime customers in the UK. Its problem is that its funding was largely inter-bank (rather than lots of small deposits) and this source dried up.

Great piece Robert and some very interesting responses.

I'm interested in the perception of Anglo-saxon recession propped up by the Eastern Tigers.

The Singaporian Government is cashed up with their Ports business doing well on the back of Chinese Exports.

I'd take 9% on my savings if I could put it in a Swiss Bank!

But are these Asian markets really as robust as we are being lead to think. The average Singaporian on $25 K Sing Dollars ( about £8K ) is struggling to enter a property market where appartments start at $300 K (Sing $). Furthermore, the children are living on their parent's Credit Cards. Sound familiar?

I'm finding it hard to believe that a US slowdown doesn't effect China
and down the gurle we all go.

Have we truly become unlinked to the US? I thought globilisation was all about linking us together! For better or worse, for richer or poorer...

Preston suggests it was out of character for the normally conservative UBS to underwrite such dodgy risks. But did he not write in an earlier article about just how impossible it was for the institutions buying this stuff to actually know the risk involved? I thought the whole problem was created because the slicing and dicing of the financial engineering was such that it was like selling sausages - nobody really knows what is in them. This is fraud really - dodgy stuff being sold on by the mortgage dealers without proper disclosure.

Writing off $17billion suggests they purchased up to 10 times that amount of CDOs and the like. I wonder what the dwindling survivors of the holocaust are thinking?

Something I'm not clear on; while the banks package up various (sub-prime) loans and sell them elsewhere, what happens to the underlying security, i.e. the mortgages over the properties involved. Do the originating banks keep these mortgages, and if so, do they really care what happens to the properties, seeing that the banks no longer have that package of debt hanging over their heads? Is there any incentive for anyone to look after e.g. empty properties and maintain some level of asset value?

Teaser Rates

First, President Bush, and now David Cameron are attempting to "do something" for borrowers who are about to see big increases the monthly costs of their mortgage loans.

Have either of them, or anyone else in authority for that matter, even begun to consider that the source of this problem may be with the lender institutions, who used teaser rates and other sorts of marketing disingenuity to sucker a vulnerable class of people into doing something that was far more in the interests of the lender than of the borrower?

Oughtn't perhaps authority to be getting the message out to the clever-clogs zillionaires of the financial sector that they will in future be expected to use their grey matter exclusively to maximise the real utility of what they produce. And that what will no longer be tolerated is for them to devote any part of their energies to devising more and more devious ways to exploit the gullibility of others, particularly those from the less fortunate groups in society?

Can anyone share their opinions why with all these writeoffs/losses, it does not initiate the bear market or a "small crash". Isn't the damages are FAR GREATER than the previous events (LTCM etc...) that caused big market downturn?

How resilient can the market be? What makes THIS TIME so different?

I happen to know quite a bit about Singapore, UBS and finance.

Don't pick up tidbits of information about a country/place/bank and extrapolate based on your experience. Plinth's post just illustrated perfectly how a little information can be misleading: Singapore has one of the highest home ownership rates in the world; this is aided by government policies that make home ownership widely affordable.

I want to point out something interesting: Remember the crashes in 1992/93, 1997/98, 2002/03 and now 2007? The way institutions react to losses by shedding staff and causing expensive senior staff to leave is potentially losing institutional experience and knowledge. Why do we get into these problems over and over again?

This is the best of times to wash drug money by buying into a financial institution or a backdoor for certain sovereign funds to buy into an established European financial institution through a proxy.

The problems at UBS are, as the editor points out, similar to those the bank faced during the LTCM crisis and in my opinion stem from the same source. Senior management within UBS and in fact most investment banks are highly incentivised to take on more and more risk in a period of low volatility as this generates higher and higher profits and hence compensation rises dramatically for senior managers, especially as taking on more risk doesn't necessarily mean higher fixed costs.
UBS, like all banks, use value at risk (VAR) models to assess potential losses on their portfolio of assets. These use historical volatility to assess the risk of each financial instrument or derivative and generally 12 or 24 month histories are used. Obviously, after a period of very low volatility of the type we have seen in markets over the past few years, the VAR models throw out relatively low risk numbers(generated by the risk departments = number crunchers). Senior management all know that these risk numbers understate the true risk of their portfolios but given that their bonuses are directly linked to the bottom line they are happy to turn a blind eye. This is especially the case since compensation has risen to eye watering levels for the senior managers.
I think if UBS actually tell us the detail of how they lost their (shareholders') money it will become apparent that those running the balance sheet of the bank held a very large amount of AAA/Aaa rated CDO tranches which have gone down in value by anything up to 50%. This area of the bank would normally hold government securities or other supposedly risk free instruments. But in a period of low volatility ...

UBS just cut our pensions 2 days before Christmas. Is UBS still secure???

At least the Swiss don't panik like we Brits, they stay cool and trust their system. Even though thei are rather conservative, we have a lot to learn from the Swiss!