UBS makes bankers sweat with $7bn hit

UBS has revealed the details of a deal to offload some of its toxic debt - and it's not a pretty picture...

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Last Updated: 31 Aug 2010

Swiss bank UBS has successfully managed to get rid of a parcel of dodgy loans (mostly rated sub-prime or the marginally less risky Alt-A) for $15bn to US fund manager BlackRock, as it tries to restructure its balance sheet and get rid of some of the toxic debt that forced it into $37bn of write-downs recently.

However, it’s taking a real hit on the deal: the loans have a nominal value of $22bn, so the Swiss bank is effectively swallowing a $7bn cash loss. What’s more, it won’t even be washing its hands of the ordure completely – to make the story even more complicated, the bank is lending BlackRock $11.25bn to do the deal. So it’s still got a huge exposure to the assets that underpin these loans – it’s just exposed to them in a different way (via a leveraged loan rather than directly).

Given the events of the last few months, selling out of sub-prime seems like a perfectly sensible strategy – albeit a case of shutting the door after the horse has bolted. But the scary thing for the banking sector about this deal is that UBS has decided to take the cash loss. So far, these massive write-downs across the banking sector have been nominal losses – an accountant’s assessment of their fall in value. They haven’t actually lost real money, as most of us would understand it.

It’s a bit like your house – even if its value falls by 7% this year (as the Council of Mortgage Lenders predicted today), you won’t actually lose any money until you come to sell or remortgage it. In the same way, bankers will have been hoping that the value of these sub-prime loans would actually recover as the market picks up – meaning their actual losses would be much lower than their nominal losses (a theory propounded by The Bank of England earlier this month). But by choosing to offload these loans now, UBS is accepting the $7bn cash loss – presumably on the assumption that it might yet get worse…

Nervous City types will be hoping that the Swiss bank has just blinked too soon...

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