Bad Day in Banking: UBS Offsets $10 Billion in Write-Downs With Sale of $11.5 Billion in Shares to Singapore

By Mike Caggeso
Associate Editor

Faced with a $10 billion write-down and the possibility of its first annual loss in a decade, Swiss banking behemoth UBS AG (UBS) announced it received an $11.5 billion investment from state-run venture funds in Singapore and the Middle East.

The maneuvering by UBS was just one of several key developments in the global banking sector yesterday (Monday). In other news, a bank in France was forced to shift around assets after subprime investments soured. And U.S. giant Bank of America Corp. (BAC) closed a special money-market fund after losses sent institutional investors running for cover.

UBS is Europe’s fourth-largest bank, but has now become its single-biggest victim of the U.S.-led subprime mortgage crisis: The $10 billion write-down announced yesterday follows a $3.8 billion write-off that was announced in October. The bank said that further write-downs were unlikely, but also didn’t rule out the possibility.

“Conditions in the U.S 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,” Marcel Rohner, UBS Group chief executive officer, said in a statement, adding that the value of the Swiss bank’s subprime holdings are unknowable. “In our judgment these write-downs will create maximum clarity on this issue and will have the effect of substantially eliminating speculation.”

Sovereign Funds Strike Again

UBS partially offset the bad news by jointly announcing plans to rebuild capital by selling an $11.5 billion stake in the bank – about $9.75 billion to state-run Government of Singapore Investment Corp. Pte. Ltd (GIC) and another $1.77 billion to an unnamed “strategic” Middle East investor. The deal gives Singapore a 9% stake in UBS in a deal that closely mimics the cash infusion the Abu Dhabi Investment Authority, an investment arm of Abu Dhabi’s government, provided U.S. banking giant Citigroup Inc. (C) two weeks ago. Citi, after announcing up to $11 billion in write-downs and seeing its stock plummet nearly 42% year-to-date, welcomed a $7.5 billion cash infusion from Abu Dhabi’s state-controlled sovereign wealth fund. The Abu Dhabi investment gave the country a 4.9% stake in Citigroup.

The UBS stock sale will transform GIC into the bank’s largest single investor. Tony Tan, deputy chairman of GIC, said the Singapore government has no intention to interfere with UBS operations, the Associated Press reported.

“We did not make it a condition that our investment should have a representation [on the UBS board]. We have no desire to control the business of the bank,” Tan said.

Subprime Ripples Again Reach Europe

In other European banking news, Societe Generale SA (SCGLY), France’s second-largest bank, announced it would shift $4.3 billion in assets onto its own balance sheet to rescue its only structured investment vehicle (SIV) – the Premier Asset Collateralized Entity Ltd. (PACE) – because of losses stemming from the U.S. subprime mortgage market.

Bloomberg reported last week that PACE was close to failing liquidity measures that would trigger an “enforcement clause” requiring the appointment of a trustee to protect senior debt holders. 

Societe Generale decided to take preemptive action and follow the precedent set by HSBC Holdings PLC (HBC), which bailed out two of its SIVs by shifting $45 billion of fund assets onto its own balance sheet in late November.

“This is obviously bad news,” Pierre Chedeville of CM-CIC Securities, told The Associated Press. “But, above all, it shows that the crisis is not over yet, contrary to what some people thought.”

Another Money Fund Takes a Hit

Columbia Management, a unit of Bank of America Corp., says it is shuttering its $12 billion Strategic Cash Portfolio – which only months ago was a $40 billion fund – after major institutional clients pulled out after the complex asset-backed securities it held generated big losses, The Wall Street Journal reported.

The Strategic Cash Portfolio is what is known in industry parlance as an “enhanced money fund,” a product that targets institutional investors and is designed to provide a better return than a conventional money-market fund. But unlike those regular money-market funds, the Bank of America fund offered investors no guarantees it would maintain its $2 a share net asset value – though that obviously was still a goal the fund’s management pursued. The fund’s current net asset value is $0.994, firm officials told The Journal.

News and Related Story Links:

  • Associated Press:
    Subprimes Force UBS to Write Down $10 Billion
  • Associated Press:
    France's Societe Generale Bails Out SIV