UBS's Chairman Steps Down Amid $19 Billion Writedown; Announces $14.8 Billion Rights Issue

Implications: At UBS's Annual Shareholders Meeting the topics of discussion included UBS's $19 billion writedown, its $14.8 billion rights issue to raise capital and the replacement of Chairman Ospel by UBS's current Legal Counsel, Peter Kurer. UBS's huge bet on subprime investments has led to the largest bank writedown so far and UBS has moved to segregate the bulk of its subprime related investments via a mortgage escape route to reduce its exposure and shield its core businesses. UBS's subprime troubles led to its first loss in 2007, since UBS first became a bulge-bracket firm about 10 years ago. UBS's $14.8 billion rights issue should bolster their capital base so they can get lending again and plug a hole in its balance sheet due to the $19 billion writedown in 1Q08. Under intense pressure Chairman Ospel reversed his decision to seek re-election at the Annual General Meeting on April 23, 2008, even though Ospel contended that he was the "best placed person to rescue UBS." 

Analysis: UBS plans a $31 billion mortgage escape route in an attempt to stop the bleeding from its subprime related losses and $19 billion writedown in 1Q08.  UBS has $15 billion of subprime mortgage related positions and $16 billion Alt-A mortgages on its books. UBS's remaining exposures to high risk residential mortgages will be moved into a new on-balance sheet investment vehicle. UBS has not outlined how the new investment vehicle will be setup, its structure or how soon outside capital may be injected into the vehicle.

1.  UBS plans to sell stakes in the vehicle to hedge funds and other investors to potentially save UBS from having to conduct a fire sale of its assets, which could result in UBS incurring even greater losses

2.  UBS offloaded over $23 billion worth of U.S. mortgages in December 2007, to buyers who were interested in distressed assets and questions are now swirling whether UBS will spin off its investment bank that was created by outgoing Chairman Ospel

Takeaway:  UBS's most significant fund outflows began in February and March of 08, when the media began scrutinizing UBS, which could have scared investors away. In another twist in the UBS saga, UBS's former President, Luqman Arnold, who was forced out in 2001 and now heads up the investment firm Olivant, has secured about a one percent stake in UBS and wrote a letter to UBS's Board outlining his recommendations to split up the bank. Perhaps UBS could fare better if the bank was split up.