Opening Bell: Subprime Mess Snares UBS

Swiss bank’s massive write-down; Bush regulatory plan panned; central banks scramble; etc.

Swiss banking giant UBS announced this morning that it would take a massive $19 billion write-down of its assets in the first quarter and seek $15 billion in new capital, Bloomberg reports. Its chairman, who helped create the behemoth through a merger with Paine Webber several years back, is resigning after the losses, which are due largely to U.S. mortgage-backed securities.

It’s the second time UBS has had to go hat in hand to investors in recent months as write-downs have diminished the capital reserves it is required to hold. The Wall Street Journal says the bank will take the dud assets and quarantine them in a separate unit, which it hopes to sell or spin off.

The debacle is hurting the bank’s core business:

Furthermore, a solid capital base is a prerequisite to attracting wealthy clients to its high-margin private banking arm, which analysts believe is already being hit by outflows as nervous clients withdraw assets and channel them to rival banks.

The Financial Times contradicts that, saying UBS reported money continued to pour into that business. The paper notes that UBS’s exposure to subprime mortgages fell by nearly half in the first quarter to $15 billion.

And the beat goes on

Deutsche Bank, which has weathered the storm well so far, announced it will take a $4 billion hit in the first quarter for losses on mortgage securities and leveraged buyout loans.

And Lehman Brothers says it will raise more than $3 billion to boost its capital position and help fend off rumors that it’s going the way of the Bear.

In other housing-related news, the WSJ reports Thornburg Mortgage narrowly averted bankruptcy after investors agreed to buy $1.4 billion in bonds and other assets. The company, though, will have to pay a whopping 18 percent interest on those bonds, up 50 percent from the still-high 12 percent it was seeking to pay just a couple of days ago.

Bush plan DOA

The backlash against the Bush administration plan to update financial regulation picked up yesterday, the papers say.

The Journal leads its sixth column on A1 with a story saying lobbyists, small banks, and some state officials are opposed. The New York Times on A1 says in its lead that many predict it’s “dead on arrival.”

“The Treasury Department’s blueprint is designed to boost Wall Street’s competitiveness, not Main Street investor protection,” said Karen Tyler, president of the North American Securities Administrators Association and the securities commissioner of North Dakota.

Consumer groups also criticized it.

“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system,’ ” said a statement issued by the Consumer Federation of America… “Experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets.”

Perhaps unsurprisingly, given Paulson’s recent history as head of Goldman Sachs, Wall Street and Big Business seem to be the only parties that like the plan.

The NYT says senior Democrats think the regulatory shuffle isn’t a high priority—especially in a presidential election year—and that they’re focused on bailing out homeowners.

The Los Angeles Times also quotes the CFA and has our Quote of the Day:

“It was regulators’ mindless belief that the market is always right that made them deaf to warnings that the sub-prime market was trouble,” said Barbara Roper, investor protection director for the Consumer Federation of America. “Until you change that attitude and the reluctance to regulate, consumers and investors aren’t going to see any benefit.”

Another hedge fund bites it

Another hedge fund is in trouble. This time it’s Pardus Capital Management, which isn’t letting investors withdraw their money “at a time when many of its holdings are plummeting in value,” says the Journal on C1. It doesn’t want to be forced into a fire sale of assets that nobody wants at the moment.

Pardus, which manages more than $2 billion in funds, is known as an activist investor who’s trying to force Delta and United airlines to merge. Its fund is down 40 percent from its peak last year.

Meanwhile, the FT says so far this year, hedge funds are off to their worst start in history, but doesn’t tell us just how bad that is. Numbers, people. The paper does say March was the worst hedge-fund month since Long Term Capital Management blew up in 1998. Hedge funds were down 2.4 percent on average last month.

“I’d like to say there was a bright spot but there really wasn’t,” said one prime broker.

A whiff of desperation

The FT fronts a story reporting that central banks are discussing “radical strategies” to deal with the financial crisis. It says those include suspending capital requirements, taxpayer purchases of untouchable mortgage-backed securities, and even a “taxpayer-funded recapitalization of banks.”

It’s a sign of the desperation governments are facing that would consider such “extreme measures.”

Greedy insurance companies

The NYT leads its front page with a report saying insurance companies are forcing those who file disability claims to apply for Social Security disability pay in a bid to lower the insurance firms’ payouts. The Times says the “system is choking on paperwork and spending millions of dollars a year screening dubious applications” pushed by the insurance industry.

The flood of referrals, however, is making it hard for Social Security to respond to people who are truly disabled, said Kenneth D. Nibali, the former top administrator of the Social Security disability program.

“Anybody who is forced to come into this system, and who doesn’t need to be there, is affecting someone else,” said Mr. Nibali, who retired in 2002 and is serving as an expert witness for the plaintiffs. “They’re holding up cases for the people who have been waiting for months and years, who in many cases are much worse off.”

Already, the disability program is in much worse shape financially than the old-age portion of Social Security. It is projected to run out of money in 2026, 16 years ahead of the old-age trust fund.

The disability caseload is also expected to grow as the work force ages, since recovery time increases with age. The number of people waiting for hearings on their claims by an administrative law judge has more than doubled since 2000, and the average wait has grown to 512 days in that time, from 258 days.

The Times tells the story of a woman who got a monthly $50 check from insurer Unum Group after a car accident. Unum pestered her at least ten times to file for Social Security even though the woman didn’t want government aid and her doctors told her she would get better.

Forcing people who are injured to apply for Social Security before paying their claims appears to bolster insurers’ profits in several ways. If claimants refuse to apply, the insurers can simply stop paying their benefits, said Dawn Barrett, an employee of the Cigna Corporation, who grew frustrated sending people to Social Security and who is now a plaintiff in one of the lawsuits. More typically, she said, people apply for Social Security when an insurer tells them to. That allows the insurer to reduce its claim reserves, money that is kept in conservative investments for benefit payments. And in the insurance industry, smaller reserves mean bigger profits.

The flack for Cigna says, “Our goal is to ensure that each member receives all of the benefits to which he or she is entitled.”

Just as long as Cigna doesn’t have to pay for it.

Retire? I should be so lucky

The WSJ fronts a story saying more Americans are delaying retirement because of the bum housing market and overall economic uncertainty.

Millions of retirement-age Americans, stung by the recent economic pall, suddenly are having to reassess their plans—with many forced to quickly change course. In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those 65 and over in the work force rose to 16.2% from 16% in the same time span—meaning 212,000 more hands on deck. So far, the numbers for March continue to show a “sharp” increase, says Steve Hipple, a department economist…

The double dip, affecting asset owners of every age bracket, is unprecedented in recent decades. In 1987, property and market values dropped in tandem—but nowhere near the extent to what’s happening now. To document similar conditions, “you’d have to go back to the era of the [Great] Depression,” says financial historian Richard Sylla of New York University’s Stern School of Business.

Dull but deadly

The Journal’s C1 Ahead of the Tape column is particularly good today, focusing on a topic that makes most of us glaze over—credit-default swaps. But hang with them, this is a huge, huge area of concern, and the paper notes that the Bush regulatory plan says little or nothing about it.

These financial instruments, which don’t trade on exchanges, are like disaster insurance on debt defaults. Investors who buy these swaps get a big payment if a bond or loan defaults. In return for the protection, the investor has to make regular payments to the seller of the swap.

To spice it up a bit, recall that these are the things Warren Buffett has called “weapons of mass destruction,” said he doesn’t understand them, and lost hundreds of millions of dollars through his insurance companies to unwind credit-default contracts they had acquired. The Journal brings up Bear Stearns and says its fall could have led to a domino effect on Wall Street because of CDS.

Credit-default swaps were a factor in the recent troubles of Bear Stearns. Hedge funds and other firms that were on the other side of credit-default swap trades with Bear tried to exit from their positions or pass them on to other brokers. That set off a broader panic about Bear’s health as a counterparty, which pushed the firm to the brink.

Swaps also played a deciding factor in the Federal Reserve’s dramatic intervention. If Bear went down, others could have been dragged down through their exposure to the firm through swaps.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.