Thursday, April 24, 2008

Explain This

Switzerland's largest bank, USB, issued a report yesterday to its regulator explaining how it lost more than $37 billion on its U.S. subprime mortgage investments. USB is one of the biggest losers in that market.

UBS's report offers some entertainment value. Dressed up in shareholder speak, it sounds a lot like what my kids tell me when they screw up (so far, not $37B):

Hey, everybody was doing it: UBS's approach to risk measurment and valuation of structured credit projects "reflects issues which were not unique . . . a number of other financial institutions with exposure to the U.S. subprime market used similar approaches."

UBS screwed up, but in a really classy way: Its analysis "identified a number of factors within the Risk Control functions, specifically within Market Risk, that suggest that the overall Risk Control framework was insufficiently robust."

Devil made me do it: In July 2005, the investment bank's senior management was replaced by managers with "strong sales and client attributes" who apparently lacked the "strong risk background" of the departing managers.

I didn't mean for this to happen. USB's research team issued negative reports on the U.S. subprime market but managers ignored them thinking that "deterioration in the subprime market would not impact [triple A rated] assets."

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