UBS Gives Haircuts

UBS Gives Haircuts
Vidya Ram, 03.28.08, 5:00 PM ET


In its advertising, UBS tells clients “it’s you and us,” but on Friday it told investors “you’re on your own.”

The Swiss bank told clients it was reducing the value of auction-rate securities in their accounts, by an average amount of 5%. It also refused to buy the bonds back from investors who bought the securities, thinking they were getting an easy-to-sell, higher-yielding alternative to money market funds but instead found themselves stuck with illiquid securities and capital losses, courtesy of the global credit crunch that began in the U.S. subprime mortgage market.

“This is the right thing to do,” said a UBS spokeswoman. “This is in the best interest in our clients regarding our accounts. Given the current market dislocation this the next logical step for any committed wealth manager.”

Auction-rate securities are long-term bonds issued by local governments, agencies, or corporations but sold in periodic auctions, say every 7 to 28 days, to set the interest rate. Firms that handle the auctions, like UBS and most of the big Wall Street concerns, used to step in an buy in the auctions if there weren’t enough bidders.

But that all went by the wayside in January and February as investors fled the bond markets. Auctions failed after no buyers showed up and the banks refused to step in as they had previously done. That meant the auctions failed, leaving brokerage customers holding the bag and issuers paying much higher penalty interest rates. The Port Authority of New York and New Jersey, for example, saw its rate skyrocket to 20% from 4% when its auction failed in February.

As a consequence of paying soaring penalty rates, many issuers are converting their auction rate bonds to fixed-rate bonds, putting more pressure on the remaining auction-rate securities that still haven’t started selling again. The bonds cost more than the issuers were paying on the auction-rate securities but yield far less than the penalty rates.

The banks backed off supporting the auctions because they didn’t want to risk taking more illiquid assets on their books after collectively writing off more than $100 billion in mortgage and credit derivatives. UBS has been among the hardest hit of the banks, already writing down $17 billion worth of credit holdings and facing another $11 billion in write-downs in the first quarter, according to analysts at Oppenheimer.

Its problems don’t stop there. Massachusetts securities regulators subpoenaed UBS, Merrill Lynch and Bank of America about their sale of auction -ate securities to customers, particularly bonds sold in closed-end mutual funds. The state is looking at what the banks disclosed about the possible risks of the securities.

“We received calls from a young saver whose house down payment is now frozen; two siblings whose family trust is now frozen; and small business owners who find their business interrupted because money they thought was liquid is tied up in these frozen securities,” said William Galvin, the Massachusetts secretary of the commonwealth, in a statement.

UBS wouldn’t say how much its brokerage customers own in auction rate securities, but the market is about $330 billion. The timing of UBS’s decision is perhaps telling. American investors are facing tax time, when many will need access to cash to pay Uncle Sam.

The Swiss banking giant previously told customers who were unable to sell the securities in scheduled auctions that the bonds would retain their full value and receive enhanced interest rates, according to

After falling 2.4% in Switzerland, to 28.98 Swiss francs, before the announcement, UBS American depositary receipts slid further in New York, dropping to $27.80, a loss of $1.33, or 4.6%, on the day. Less than a year ago, the stock had been above $66.

Investors who feel betrayed are likely to sue, adding to the pressures on UBS from the global liquidity crisis that began in the U.S. subprime mortgage market. UBS was the first major global bank to be hit by a lawsuit over losses related to the subprime crisis.

Hong Kong Reloaded

Not long ago, the city’s time was said to be over. Not anymore. Like an indestructible kung fu champ, it’s kicking back—big time. Karl Taro Greenfeld gets right into the action

We’re downstairs at King of the King, a Cantonese seafood restaurant in Hong Kong’s Central district. Behind lacquered–wood partitions, mah–jongg players shuffle tiles, making that noisy rattle—like a thousand impatient women tapping their fingernails. But the eight of us seated around a white cloth–covered table are playing poker, not mah–jongg. While the cards are dealt, the talk is of deals and business and opportunities and new properties. A hotelier, Jason (who brought me here), is wondering about selling out to a Russian businessman, and Ben, the scion of a wealthy family, is discussing investing in some property in Beijing, and Chris, a trader for a hedge fund, says that the thing to do is borrow in Hong Kong dollars at two and three–quarters percent and deposit in Australia at five and three–quarters and use the spread to buy a new Ferrari. Then the guys are talking about Full House, one of the Korean soap operas sweeping greater China and starring the actress Song Hye Kyo, who is so fine—a little chubby, comments someone, but she’s still so leng lui, dude. But the conversation, between hands, keeps going back to deals and opportunities and property: the development in Kowloon West, Korean equities, new hotels, better cars. As I wait for my cards, I look around and notice that everyone at the table is wearing a better wristwatch than I am. When I ask Chris, who is next to me, what time he has to go to work in the morning, he shrugs. “Whenever.”

In Hong Kong today, it seems that no one is bothering to earn a living because everyone is too busy making a killing.

In between noodles with pork, bowls of fried rice, and crab and corn soup, I find that I am losing track of the half–Cantonese, half–English conversation and become slightly impatient, so I go all in with two pair, kings over sevens, and this guy Scotty across from me in a hoodie sweatshirt, a Nike visor, and his cell phone dangling from a lanyard around his neck calls me and has kings and jacks. I’m about to buy in for another sixty dollars when I look around the table and wonder who the easy money is and realize that it’s me.

I fold my cards and explain to Jason that I have to meet someone, which is true, and I take my leave—past the clattering mah–jongg tables, the fish tanks stocked with garoupa whose bulging eyes make them look as if they are taking pity on my losing ways—and head up the stairs and out the door and onto Queen’s Road, where the air is hot and damp and smells of wet concrete and Victoria Harbour.

There are the usual crowds of well–dressed Hong Kongers out for the evening: businessmen in summer–weight suits and wire frame glasses; pretty girls with hennaed hair, artisanal T–shirts, and treated denim jeans; gweilo—Western women in shiny tops, jeans, and strappy heels. The sidewalk is hard going: The pavement is being torn up. Steel pedestrian bridges laid down over scars in the concrete reveal tangled layers of fresh plumbing and fiber–optic cable. The city, apparently, is rewiring.

I ride up an escalator at the Entertainment Building, cross over an air–conditioned pedestrian bridge to Central Tower, then another to the Central Building, then to The Landmark complex, Alexandra House, and the Princes Building and I’m back in the Mandarin Hotel—all the way across Central Hong Kong without setting foot outdoors. I’ve always enjoyed this particular route, not only for its convenience but also for the feeling of being above it all and for the perspective it provides into Hong Kong’s psyche. In the past, I observed that it took me by two Prada stores (just in case I’d forgotten to pick something up at my first Prada opportunity, or, even more worrying, something I’d bought at the first shop had gone out of fashion before I reached the second). Then, in the bleak early years of this century, the route took me past shuttered boutiques, the occasional bum, and, for a time, anxious pedestrians wearing surgical masks. I recall making the walk in the opposite direction, from the Mandarin to the nightlife district of Lan Kwai Fong, and not seeing another soul for most of the trip. That was in early 2003, at the height of the SARS scare.

My family and I moved away from Hong Kong in 2004, after living in the city for more than three years. When we left, the territory was still reeling from SARS, the lackluster leadership of Chief Executive Tung Chee–Hwa, and paralyzing pro–democracy marches. Unemployment was stuck at ten percent. The property market, still the main economic driver in Hong Kong, had plunged fifty percent from its late–1990s highs, leaving 200,000 homeowners in this city of seven million people in a negative equity position in which they owed more on their flats than they were worth. Luxury hotels were closing. Restaurants were nearly empty. I would occasionally find myself the only shopper in swanky boutiques.

It was as if everyone’s worst fears about Hong Kong’s return to China had come true. With reunification, it seemed that Hong Kong’s advantages—rule of law, convertible currency, world–class service, a large and sophisticated business and financial community—would gradually be arbitraged into irrelevance as Western businesses bypassed the Fragrant Harbor (the literal translation of Hong Kong) and headed straight for Guangdong and Shanghai. Who needed Hong Kong anymore, the reasoning went, if you could deal directly and more cheaply with the Chinese? There was a creeping sense that this city, which had once seemed a world metropolis on a par with New York, London, and Tokyo, was no longer even the most important city in southern China.
Continue reading Hong Kong Reloaded

The Intentions

bsam pa bzang na sa dang lam yang bzang/ /
bsam pa ngan na sa dang lam yang ngan/ /
thams cad bsam pa dag la rag las pas/ /
rtag par bsam pa bzang la ‘bad par bya/ /

If the intentions are good, then so will be the levels and paths.
If the intentions are bad, then the levels and paths will be too.
Since everything depends on one’s intentions,
Always strive to make sure that they are positive.

~ Je Tsongkhapa, A Literary Gem of Poetry ~