A Perceptive Postmortem

UBS comes clean on the causes of its whopping write-downs.

Although only time will tell if it remains at the top of the subprime-loss heap, UBS takes the prize for the most forthcoming mea culpa. In April it published a 50-page document titled “Shareholder Report on UBS’s Write-Downs,” in which it described how failures in its corporate governance, organizational structure, risk management, and other functions contributed to its losses. “UBS raised the bar in terms of transparency,” says Cubillas Ding, a London-based senior analyst with consulting firm Celent.

UBS may have felt compelled to come clean because its shareholders, used to its solid, stable private-banking business, were rocked by the volatility that has accompanied the firm’s move into investment banking. And the firm may have sensed that the time was right to fess up. After all, “there are few times in history when you can take a $7 billion or $8 billion write-down without anyone blinking an eye,” says Rob Hegarty, managing director of securities and investments with TowerGroup.

Among UBS’s action items was a renewed commitment to risk management. While no U.S. firm has followed the Swiss banking giant’s lead in terms of detailed explanations of just what went wrong, some are also taking steps to shore up their risk functions. Francis Diebold, professor of economics and co-director of the Wharton Financial Institutions Center at the University of Pennsylvania, says that to date the function “has been largely a statistical exercise” to quantify the expected distribution of returns on a particular portfolio. The scope should expand, he says, to include the incentives and structures that underlie deals.

Diebold adds that the push for a more principles-based approach to regulation may prove valuable. “It’s premature to speculate on the outcome,” he says, “but the debate will be and should be very real. The issues that shaped UBS’s experience are fascinating and have ramifications for the future of global financial regulations.”

Banks suffering the largest subprime-related writedowns/credit losses as of April 2008

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