UBS says Ospel resigns after writedowns lead to $11.9 billion loss

April 3, 2008
Singapore Democrats

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Elena Logutenkova
Bloomberg

UBS AG, battered by the biggest writedowns from the collapse of the U.S. subprime mortgage market, reported a 12 billion-franc ($11.9 billion) first-quarter loss and said Chairman Marcel Ospel will step down.

The bank will seek 15 billion francs in a rights offer to replenish capital, on top of 13 billion francs already raised from investors in Singapore and the Middle East. UBS will write down $19 billion on debt securities, bringing the total to almost $38 billion since the third quarter of 2007. Zurich-based UBS also said today it will cut jobs at the investment bank.

 

Ospel, 58, who helped form the world’s largest money manager a decade ago, will be replaced by general counsel Peter Kurer. Deutsche Bank AG reported $3.9 billion of writedowns and said today that markets are ”significantly more challenging.” UBS rose as much as 10 percent in Swiss trading on optimism the country’s biggest bank will recover from its subprime losses.

”Behind closed doors they have been cleaning up very swiftly and the capital increase will put them back onto a solid foundation,” said Joerg de Vries-Hippen, who oversees about $26 billion, including UBS shares, as chief investment officer for European stocks at Allianz Global Investors in Frankfurt. Still, ”it will take years to repair the bank’s reputation,” he said.

UBS rose 2.02 francs to 30.88 francs by 1:08 p.m. in Zurich. The stock has fallen 41 percent this year, cutting the bank’s market value to 64 billion francs and making UBS the second-worst performer on the 60-member Bloomberg Europe Banks and Financial Services Index.

Swiss clients

The first-quarter writedown is greater than the $11 billion estimated by analysts at Merrill Lynch & Co. and Oppenheimer & Co. Rising U.S. mortgage defaults have caused about $230 billion in credit losses and writedowns at financial companies worldwide.

Standard & Poor’s cut UBS’s long-term counterparty credit rating by one level to AA- and said it may lower the rating further after the ”risk management lapses, earnings volatility, and need for new capital.”

The bank’s Tier 1 capital ratio, a key measure of solvency, will rise to about 10.7 percent after the rights offer, UBS said. Without the capital increase, the ratio would have fallen to about 7 percent, the bank said.

UBS, with about 2.3 trillion francs in private-banking assets, said clients in Switzerland withdrew funds in the first quarter. The Swiss redemptions were offset elsewhere and net investments were ”slightly positive,” Chief Executive Officer Marcel Rohner said on a conference call today.

Taking responsibility

Losses already cost the jobs of former CEO Peter Wuffli, finance chief Clive Standish and investment banking head Huw Jenkins. Ospel, who was supposed to stand for re-election at the shareholders meeting on April 23 for a shortened, one-year term, helped arrange the previous capital increase.

”I ultimately take responsibility for the bank’s situation,” Ospel said in a statement. ”With the measures that we have already taken, the proposals we are submitting to the annual general meeting and the processes we have put in place to deal with lessons learned, I believe that I have made all necessary contributions.”

Kurer, 58, who joined UBS in 2001, has been a member of the executive board since 2002. Before joining the bank, he worked as a lawyer at Homburger Rechtsanwaelte and Baker & McKenzie in Zurich. Ospel told journalists on a conference call that Kurer was chosen because he ”has a profound knowledge of global financial markets and of course of our bank.”

U.S. expansion

Ospel, a native of the northern Swiss city of Basel, has been UBS’s chairman since April 2001. He also was the driving force in the 1998 merger of Swiss Bank Corp. and Union Bank of Switzerland. Over time, Ospel solidified his grip on power at the bank even as fellow executives left after losses from the Long-Term Capital Management LP hedge fund in 1998 and the debacle surrounding the bailout of Swissair Group in 2001.

Throughout his years at the bank, Ospel spearheaded UBS’s expansion to raise profitability closer to competitors in the U.S. In 2000, UBS bought New York-based broker Paine Webber Group Inc. for about $16 billion to build its equities business.

After years of lagging behind competitors in business with fixed-income securities that drove earnings to records across Wall Street, UBS set off on an expansion plan at the peak of the U.S. housing market, only to join the list of investors burned by bets on U.S. mortgages in 2007.

Record loss

UBS was among the first stung by the subprime contagion when its Dillon Read Capital Management LP hedge fund, run by former investment banking chief John Costas, lost 150 million francs in the first quarter of last year. By May, following an internal review of the losses, UBS decided to close Dillon Read.

The bank posted a 12.5 billion-franc loss in the fourth quarter, the biggest ever by a bank, and Rohner told reporters 2008 will be ”another difficult year.”

UBS said in its annual report, published March 27, that it put in place new models for risk management and the valuation of U.S. residential real estate assets at the investment bank in the first quarter.

The bank also set up a group about 50 traders in January, whose task is to manage and reduce more than $70 billion in debt assets affected by the subprime crisis. UBS said today that it will set up a separate unit for the group to ”reduce the effect of distressed market conditions on the core businesses.”

Rohner told journalists on a conference call today that the bank doesn’t intend to conduct emergency sales of securities at ”distressed or inappropriate prices.”

Deutsche writedowns

”UBS is aiming to put a line below its risk exposure problem and refocus on operational businesses,” Kian Abouhossein, an analyst with JPMorgan Chase & Co. said in a note to clients. ”We expect risk exposed banking peers will follow, leading to a potential clearing price environment for the structured credit assets.”

Deutsche Bank, which operates Europe’s biggest investment bank by revenue, said today that it expects to book first-quarter writedowns on leveraged loans, commercial real estate and residential mortgage-backed securities.

UBS’s holdings of subprime assets fell to about $15 billion by the end of last month from $27.6 billion on Dec. 31, and Alt-A assets, which fall between prime and subprime, were cut to about $16 billion from $26.6 billion. Auction-rate securities positions, which are also subject to valuation uncertainties, rose to about $11 billion from $5.9 billion.

New terms

Raising capital again will mean UBS has to renegotiate the terms of the mandatory convertible bond it sold to Government of Singapore Investment Corp. and an unidentified Middle Eastern investor.

Under the terms of the bond, the maximum conversion price for the shares may be lowered if the bank sells more than 5 billion francs of new shares or equity-linked securities at lower prices or with a higher interest payment during one year following December’s announcement of the agreement.

New York-based Citigroup Inc. and Merrill Lynch said in January they will receive $14.5 billion and $6.6 billion from investors respectively, after getting $7.5 billion and $5.6 billion cash infusions in November and December.

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