So, remember way back when I compared the subprime mortgage crisis to Cthulhu, the unspeakable Lovecraftian god of the Old Ones, or something like that? (Yeah, some fantasy writer I am.)
Well, the tentacular one has struck again. This time giant Swiss banking concern UBS said it would have to write down another $19 billion in losses, bringing its total charges to $40 billion. It suffered a first-quarter loss of $12 billion. Chairman Marcel Ospel was then let go, following the ouster of CEO Peter Wuffli in 2007.
So what does UBS have to say about the year that was? Let’s take a look at the documents.
In a press release announcing the loss, the company said it is forming a work-out unit that will segregate the riskiest US real estate investments from the rest of its portfolio. Good. Taking steps.
In its 2007 annual report the company elaborates: In the section on risk, the company states, “neither trading management nor market risk controllers foresaw the extreme developments in the previously deep and liquid US residential mortgage market, which revealed the tail risks in UBS’s portfolio.”
Really? So what about this guy? And even if you say, well, one guy, he got lucky, rising interest rates were already a concern in 2006, and were affecting the homebuilding industry. Somebody had to see it coming, that rising interest rates would affect subprime borrowers.
In fact, the company goes on to say, “This experience does not invalidate UBS’s risk management and risk control principles …” The company just has to tighten its procedures, UBS explains. While maybe radical change isn’t called for, surely the definition of insanity is doing the same thing over and over and expecting a different outcome?
It almost sounds like for all their fine talk about risk assessment, UBS really didn’t think that its positions were all that — risky. What it has to base this on is unclear, as it doesn’t really explain why in the annual report.
To be fair, the problem is not UBS’s alone. I could have taken a peek inside any annual report and found the same things — the market took an unexpected turn and we are tightening up controls to make sure it doesn’t happen again.
And sure, this particular meltdown won’t happen again. It’ll be something else, and once again annual reports will say, “Gee, we didn’t see that one coming.”
It might be unfair to expect fortune-telling, but surely adequate risk assessment and controls isn’t too much to ask, especially since the procedures are already in place.
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