Cue the music. Again. In a sign that financial losses associated with mortgage banking have yet to run their course, UBS said this morning it will take a $10 billion charge in the fourth quarter, citing revisions to "key input parameters of the models that are used to estimate lifetime default and resulting losses for sub-prime mortgage pools." From the press statement:
In response to continued deterioration in the US sub-prime mortgage securities market, partly driven by increased homeowner delinquencies but mainly fuelled by worsening market expectations of future developments, UBS has revised the assumptions and inputs used to value US sub-prime mortgage related positions. This will result in further writedowns of around USD 10 billion, primarily on CDO and "super senior" holdings. In light of continued deterioration in the sub-prime market, valuations of UBS's remaining sub-prime positions reflect the extreme loss projections implied by the prices achieved in the very limited number of observable market transactions in US sub-prime related securities and indices up to the end of November.
Note that the above suggests UBS marked assets to market here, instead of marking to model. As a result, UBS revised its fourth quarter guidance from a profit to a loss, and said that fourth quarter losses may be large enough to push the Swiss financial giant to a full-year loss for 2007. In the wake of the losses, UBS said it plans to raise 13 billion Swiss francs ($11.5 billion USD) in a convertible bond offering to the Government of Singapore Investment Corporation Pte. Ltd. worth CHF 11 billion, as well as a placement with undisclosed strategic investor in the Middle East worth CHF 2 billion. UBS now joins Citigroup as the second major bank to seek capital amid subprime-driven losses. "Conditions in the US mortgage and housing markets have continued to deteriorate, and we have updated our loss assumptions to the levels implied by the current distressed market for mortgage securities," said Marcel Rohner, UBS CEO. "In the last several months, continued speculation about the ultimate value of our sub-prime holdings – which remains unknowable – has been distracting. In our judgement these writedowns will create maximum clarity on this issue and will have the effect of substantially eliminating speculation." Funny thing about Rohner: he manages to say that the value of the company's subprime exposure "remains unknowable," and follows that up saying the writedowns will "create maximum clarity." Wrap your brain around that one for a little bit - just not too long, lest you find yourself getting dizzy. Investors clearly bought the party line here, however, with Bloomberg reporting that UBS "rose 1.4 percent in Zurich trading on optimism writedowns are now out of the way."