UBS to Write Down $3.42 Billion Due to Credit Woes

UBS, the world's largest wealth manager, unveiled $3.4 billion in losses, swept out senior managers and slashed jobs in one of the biggest casualties yet from the worldwide credit crunch.

UBS said on Monday it would write down a net 4 billion Swiss francs ($3.42 billion) in its fixed-income portfolio and elsewhere, resulting in a third-quarter loss of 600 million to 800 million Swiss francs, its first quarterly loss in nine years.

UBS headquarters in Zurich, Switzerland.
Steffen Schmidt
UBS headquarters in Zurich, Switzerland.

UBS said it would shed 1,500 jobs in its investment bank -- or 7% of the division's 22,300 staff -- a sharp reversal of its recent build-up.

"It's probably safe to say, UBS won't be the last bank to announce something like this in the months ahead, but it begs the question as to how long this turmoil will continue," said Eamonn Hughes of Goodbody Stockbrokers.

Peter Thal Larsen, banking editor at the Financial Times, told "Worldwide Exchange" that UBS's losses may come from an in-house hedge fund which they had to shut down earlier this year, and which had some exposure to the U.S. subprime sector.

"I think there's a suspicion that they are now really writing this down as a result of troubles over the past weeks," Thal Larsen said.

He said other banks may fell encouraged to follow UBS's suit and come out with the bad news now: "the fact that UBS has now done it may make it easier for Deutsche Bank and others."

Deep Crisis

The loss underscores the depth of the crisis -- in which central banks have injected record amounts of liquidity into the markets to keep the financial system functioning -- and highlights uncertainties at rival banks, which may also be forced to unveil losses ahead of scheduled results.

In a separate announcement, rival bank Credit Suisse said it was also hit by the credit crunch but that it would remain profitable in the third quarter with income from continuing operations after tax of around 1.3 billion francs. The bank declined to provide further detail.

UBS' fall from grace began earlier this year when heavy costs from its rapid U.S. expansion, a wave of key defections and then surprise losses at hedge fund Dillon Read Capital Management led to the shock departure of its chief executive, Peter Wuffli.

But Rohner's writedowns and management sweep may prove to be the inflection point for UBS, said analysts at Bear Stearns.

"This is clearly not good news and adds to the catalogue of bad news that UBS has disclosed in the last year or so. Similarly, the air of stability has gone as management changes have come thick and fast," Bear Stearns said.

UBS shares dipped but later rallied alongside Credit Suisse as investors breathed a sigh of relief that the bank had appeared to draw a line under the losses, revitalise reforms and provide some clarity about its exposure.

UBS was up 2.4% at 64.10 francs at 1351 GMT while Credit Suisse was up 1.8% at 78.70 francs.

By contrast, Deutsche Bank shares eased 0.17% as concerns persisted about its exposure.

Top Managers Removed

Rohner said he was removing top managers to accelerate a transformation in the investment bank and downplayed speculation UBS would seek to split the group into its two main units: investment banking and wealth management.

Investment bank head Huw Jenkins, who drove a rapid expansion in UBS's bid to join the top five investment banks worldwide, will leave along with Group Chief Financial Officer Clive Standish.

Rohner -- who was named chief executive in July to replace Wuffli -- will assume control of the investment bank and risk-management expert Marco Suter will become chief financial officer.

The writedowns put the bank's holdings at a cautious level but do not take it completely out of the woods. It will keep $19 billion in direct subprime exposure plus an additional $4 billion in indirect subprime exposure.

"The critical time will be over in the next six months," Chief Executive Marcel Rohner said in a conference call with journalists.

Strategy Questions

The losses appears to exceed those reported so far by other investment banks.

"Today's announcement came quite as a shock. The magnitude of the writedowns by far exceeds our expectations. Still, we judge today's announcement as positive as it finally gives us more visibility," said analyst Claudia Meier at bank Vontobel.

The fallout of the subprime crisis has varied in the United States, with Goldman Sachs reporting a near 80% jump in quarterly profit last month, and rival Bear Stearns posting a 61% drop.

Investors are increasingly concerned more banks might announce losses related to credit problems as they closed their books on a tumultuous third quarter.

A meltdown in the U.S. subprime mortgage market, sparked by growing defaults on riskier loans, has created a squeeze in credit markets around the world.

Despite signs in recent weeks that the credit tightness may be easing, some banks continue to report they are struggling to find cash on wholesale lending markets.