Report on UBS' $37 Billion Writedown

Saturday, April 26, 2008 | 07:06 AM

Kids, we have some fascinating reading in store for you this weekend.

The "conservative" Swiss banking giant UBS -- and I put that in quotes for obvious reasons -- wrote down a previously unimaginable $37 Billion dollars. Their shareholders were (ahem/cough) quite perturbed. So the nice folks at UBS, with an assist from KPMG, put together a 50 page report detailing the hows and whys UBS took such a humungo hit.

For what you would expect to be a dry report, it is absolutely compelling reading. It explains much more than the subprime fiasco. The report implies that management didn't really understand what the hell they were getting into with their purchases of Warburg/Dillon Read Capital Management. This unit eventually became UBS' internal hedge fund (it has since been shut down).

I wonder if management ever truly understands the nuts and bolts of these large acquisitions. We will find out if JPM knew what they were getting into getting the Fed into with the Bear Stearns (BSC) acquisition.   

The report includes an indictment of the firm's compensation packages. The current structure -- big salaries and bigger bonuses -- encourages the riskiest and most short term of strategies. Prudence, risk management, and long term thinking were not money makers for employees. When the time came for the company to take its writedowns, many of these bad actors were long since gone.  Go on, take the money and run.

You may not be surprised to learn that external consultants were involved and recommended "streamlining of risk processes." I don't know if these unnamed consultants were McKinsey & Co., but the whole description has a faint Enron-like smell to it.   

A few other questions arise from the report: 

Why do very risky strategies seem to end up in Fixed Income ?

How did Risk Control fail so badly?

Why was there an "Absence of risk management" and "Incomplete risk control methodologies" ?

Who created these compensation system ?

Again, this is just the tip of the iceberg in terms of asking what went wrong.

I wonder if this the inevitable banking equivalent of the Minsky moment. Perhaps these megabanks are simply too big, too unwieldy to be appropriately managed as hedge funds, rather than sleepy conservative banking institutions.  The perverse incentives encourage reckless behavior.

Fascinating stuff . . .



Shareholder Report on UBS's Write-Downs
18 April 2008

UBS ShareholderReport.pdf (download)


A good name sliced, diced and traded
John Gapper
FT,  April 24 2008 03:00 | Last updated: April 24 2008 03:00

How UBS came undone
Roderick Boyd
Fortune, APRIL 23, 2008: 4:38 PM

Too many risks, too few controls, says UBS report on write-downs
David Gow in Brussels
The Guardian, Tuesday April 22 2008

Saturday, April 26, 2008 | 07:06 AM | Permalink | Comments (30) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» UBS $37B Write Down, Part II from The Big Picture
Buried at the end of the report is the criticism of the financial compensation system in place at UBS for traders and the engineers of structured products. The bigger question is how little their system differs from any other large bank or brokerage fi... [Read More]

Tracked on Apr 26, 2008 11:27:27 AM


I can't believe I'm going to recommend this but CNBC had an incredible run of clips yesterday with Stiglitz and Hormats along with interviews with El-Arrian and Roubini. All are well worth listening to (take notes there'll be a quiz) because it frames the problem. The one most germane here is one segment the guest was Bob Engle, also a Nobelist, and who's work was used as the basis for much of the modeling. As both he and Stiglitz point out there were deep flaws in the way the models were applied because folks didn't really understand them. A perfect complement to the UBS coverage.

Posted by: dblwyo | Apr 26, 2008 7:34:49 AM

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