The Quote of the Month
“Please, God, just one more bubble!” quoted from Warren Buffet’s 2007 Letter to the Shareholders of Berkshire Hathaway
The Position of the Month
Basic Position Opening Price
Basic Position Expected closing price
Advanced Investor Position Opening Price
Buy UBS $35 Jan 09 puts at $8.50 / contract or lower
Advanced Investor Position Closing Price
Sell to Close at $19 / contract
UBS is overleveraged and delaying an inevitable unwind. In the meantime, it is destroying centuries old customer confidence in Swiss banking.
Currently UBS is in a state of crisis. As Jim Cramer once said "Whenever you smell smoke, behind the door there is probably a giant conflagration!" The smoke is currently seeping out of UBS in the form of desperate measures to raise liquidity.
* UBS recently dumped $25B Alt-A mortgages due to liquidity concerns
“Analysts said they believed UBS had sold its Alt-A investments -- U.S. mortgages ranked between prime and subprime – to bond manager Pimco for 70 cents to the dollar, taking a deep discount on a 26.6 billion Swiss franc ($25.7 billion) portfolio.” Chris: A sure sign of cash concerns is bulk sales of loans.
* UBS still holds $400B in repurchase agreements for funding
“Analysts also said they expected the ailing bank making further writedowns on a massive 400 billion franc portfolio of repurchase agreements as it rushes to cut its exposure to the capital markets in general and to risky assets in particular.” Chris: This just shows how many assets they are holding out to avoid liquidating in an unforgiving market.
UBS tried to sell it’s Paine Webber brokerage arm to raise cash
“Swiss bank UBS, another bank suffering from the credit crunch, recently shopped its PaineWebber brokerage unit in an effort to drum up cash but failed to find the right buyer. (BAC, Wells Fargo and Barclays all declined).”
UBS needs to raise cash in a unforgiving market. There are tons competing assets sales, but all the potential customers are overleveraged and marketing the same securities themselves or prudent and choosier by the day. UBS needs to find solutions fast, while the clock on $400B in debt deteriorating in value is ticking away.
In the movie Die Hard, the evil villain says that after stealing $20m in bonds and lock safe baubles, he planned to store them in a “Swiss bank account and sit on the beach collecting 6%”. He might want to rethink that strategy.
For much of the 20th century Switzerland was considered the world’s safe haven for banking. African dictators, European despots, and Nazi war criminals all found it an oasis for savings in tumultuous times. In the latter part of the century, Swiss banking consolidated to two names, Union Bank of Switzerland and Credit Suisse.
At some point all this revere and sticky old money was not enough. The old money wanted higher returns and hedge funds came en vogue. UBS, providing the connections to the massive money of the old world, became a key prime broker to the hedge funds. Prime brokers are the home for hedge funds, housing them, executing their trades, finding investors, providing reports, cleaning up accounts, and even providing seed money and loans. This is very profitable considering 33% of volume in the market is hedge fund activity.
While times were good, the relationship was cozy. Now that the order of the day is deleveraging and the levered hedge funds, stuck in illiquid positions, are now more of a liability than an asset. The loans outstanding at UBS total more than $400B and cash on hand is $19B. Sounds impressive, but Bear had $17B on hand the day it folded. With the obvious implied leverage there is no doubt in my mind that UBS has been busy at the Fed discount window trading securities for treasuries that people will take for cash. The problem is that the Fed is lending only for 28 days. Every 28 days the value of the mortgage backed securities that UBS directly or indirectly is exposed to goes down in value. The house decline will not stop any time soon. So the predicament at UBS will continue to be more precarious as the weeks go by.
Position #1: C
Start Price: 27.3
Current Price: 23.78
Start Date: Jan 13, 2008
Position #2: UBS
Start Price: Not reached yet
Current Price: 29.56
Start Date: TBD