The thing about useful stuff is

Heads or tails for UBS Thursday, August 14, 2008

Image via Wikipedia I was fascinated to read in yesterday's FT that UBS is internally re-organising its' business into 3 distinct stand-alone units :- investment banking, wealth management and private banking. These will be autonomous units, albeit within a common legal entity structure, and will no longer share each other’s infrastructure, people or capital.

This is a marked reversal from previous years where "convergence" was paramount. Duplicate services between entities were rationalised into shared services and cross selling of products was high on the agenda, with the investment bank and wealth management functions seeking to manufacture products for private bankers to sell.

This former strategy is one being vigorously pursued by Barclays, which is heavily investing in upgrading its' woeful "Wealth" business aimed at high net worth individuals, with better people, products and process/systems. Notably it is seeking to manufacture products in Barclays Global Investors and Barclays Capital for Wealth customers, and share knowledge/technology across the group.

Whilst the options for UBS were not as stark as Heads or Tails, it does appears that they've elected to go in a diametrically opposed direction. Some of the Divisional Heads may well enjoy their new found independence, but overall Group costs will inevitably rise as duplicated infrastructures re-emerge and customers in some areas may suffer from the loss of access to more sophisticated offerings.

The re-struturing has also raised speculation that UBS could divest of its investment banking business, something that would have been unthinkable in recent years. Whilst strongly denied by UBS, it certainly makes "amputation" that much easier.

Labels: Barclays Capital, Barclays Global Investors, UBS AG

posted by John Wilson @ 9:57 AM Permanent Link ,

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Huge Wall St settlement for Auction Rate Securities "Victims" Friday, August 08, 2008

Image via WikipediaAccounting to the FT,

Citigroup is to buy $7.5bn worth of ARS from retail investors in the next three months while Merrill Lynch announced that it would buy back ARS it sold to investors starting next year. There are currently $12bn of such holdings but Merrill said it expected there would be $10bn by the time it begins its buy-back. Meanwhile, UBS was on Thursday night close to finalising the details of its own deal with regulators.
Apparently Citi also has to pay a $100m fine to settle claims from regulators that it had misrepresented ARS as liquid, cash-like securities.

I previously wrote about the ARS market here.

These are staggering deals, imposed by the regulator to "protect" Main Street from being financially injured.

Prior to markets seizing up, ARS markets were indeed very liquid and paid higher returns to investors than bank deposits, with rates set through an auction clearing process. To my knowledge, relatively few investors suffered any capital losses since the lenders remained solvent. What disappeared was the liquidity that enabled people to release cash by selling their holdings i.e. buyers simply disappeared regardless of rates on offer. Lenders, as a consequence of being unable to refinance elsewhere, were also unable to buy back the securities despite the punitive rates many of them were obliged to pay under the terms of the securities.

The penalities / settlement redresses two issues

1) Wall Street brokers failed to alert people to the fact that the markets were becoming increasingly illiquid i.e. negligent in their duty to clients. Obviously had they done so, that would have simply accelerated the collapse in such markets.

2) The banks themselves took advantage of clients by offloading increasingly illiquid stock onto them, prompted by internal risk concerns, whilst maintaining their stance that there were no problems.

What is most disturbing about this episode is that an efficient cash market and the related instrument has been irreputably harmed to the detriment of future borrowers and lenders alike.

Labels: auction rate securities, Citigroup, Merrill Lynch, UBS AG, Wall Street

posted by John Wilson @ 10:15 AM Permanent Link ,

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Auction Rate Securities are toxic at UBS Monday, June 30, 2008

Image via WikipediaIt is amazing that banks continue to use email given that they regularly are the means by which they hang themselves. In the latest episode, William Galvin, secretary of the Commonwealth of Massachusetts, subpoenaed documents from UBS which revealed that they were desperate to get rid of their holdings in auction rate securities from their balance sheet and dump them onto any unsuspecting victim / client. Meanwhile, the firm stuck to the public line that these remained highly liquid instruments.

When the $300bn ARS market seized up in Q108, many investors found themselves unable to liquidate at any price, albeit often receiving interest rates far in excess of the market rate.

The International Herald Tribune has the story here. It seems inevitable that UBS will be hit hard both financially and reputationally given the apparent mis-selling the emails suggest.