UBS faces 'major' CDO losses

UBS AG, Europe's largest bank by assets, may have lost as much as $9 billion on collateralized debt obligations, according to CreditSights Inc.

The losses would be almost half the Zurich-based bank's $20 billion of top-rated CDOs, securities based on underlying assets. CreditSights, the independent research firm in New York, based its analysis on the bank marking down its holdings to prices indicated by benchmark indexes rather than methods used by UBS.

"While we do not expect it to make the additional $9 billion of writedowns estimated by our model, we do not see how it can avoid further substantial losses," CreditSights analysts led by Simon Adamson in London said in the report. "UBS is by far the most vulnerable bank in absolute terms" out of the nine European banks surveyed by CreditSights, the report said.

The world's biggest banks and securities firms have disclosed more than $50 billion in writedowns on securities linked to subprime mortgages. Losses by banks may reach as much as $400 billion worldwide, Deutsche Bank AG and Goldman Sachs Group Inc analysts said last week.

Citigroup Inc, the largest US bank by assets, was lowered to "sell" by Goldman analyst William F. Tanona, who predicted that the lender's writedowns of CDOs will total $15 billion over the next two quarters.

UBS was cut to "hold" from "buy" by Dresdner Kleinwort analysts, citing potential subprime writedowns of 11 billion Swiss francs ($9.84 billion).

UBS spokesman Dominik von Arx in London said the bank expects to report a profit in the fourth quarter. "Speculation of $9 billion writedowns isn't compatible with that outlook," von Arx said.

Quarterly loss

UBS posted its first quarterly loss in almost five years on October 30 after the US housing slump caused it to write down about $4.4 billion on fixed-income securities.

The bank's CDO losses are on portions called super senior because they were considered "virtually risk free" and the idea of writedowns was "unimaginable", the CreditSights report said. Ratings firms have cut 28 super senior portions of CDOs, eight of which dropped to high-risk, high-yield, or junk, JPMorgan Chase & Co analysts said in a report this month.

CDOs package bonds and loans including mortgage-backed securities and use the income to pay investors.

Debt ranked below Baa3 at Moody's Investors Service and BBB- by Standard & Poor's is regarded as high-risk, high-yield.

CreditSights calculated expected losses by marking bank holdings to prices indicated by the ABX indexes, a benchmark for speculating on subprime-mortgage defaults.

Bloomberg News

(China Daily 11/21/2007 page16)