A $19bn write-down in the first quarter, taking total mortgage related losses to $37bn; a $15bn emergency rights issue; and the resignation of the chairman at UBS doesn’t exactly sound like good news.
Meanwhile, Deutsche Bank announced e2.5bn ($3.9bn) of write-offs and Lehman Brothers shored up its injured balance sheet by raising $4bn in capital. Yet all this prompted a surge in global equity markets on Tuesday, with UBS shares closing 12% higher.
Why market confidence is up
Following UBS’s huge write-off, the hope is that banks are no longer in denial and are finally beginning to reveal the true extent of their credit losses; the worst may now be over. “The sooner the bad news is out in the open, the quicker the problems can be repaired,” said Peter Dixon of Commerzbank. But as Julia Finch put it in The Guardian, “that noise we can hear may be the sound of traders grasping at straws”.
There is still a long list of things to worry about. The US housing market is sliding ever faster, and UBS is still exposed to $31bn of debt related to subprime and Alt-A loans. Goldman Sachs is projecting further mortgage-related first quarter losses at Citigroup and Merrill Lynch.
More trouble in store
And as Philip Shaw of Investec noted, greater clarity about subprime mortgage losses is just one area of concern. Goldman and Merrill are also likely to record billions of new write-downs on leveraged loans and commercial mortgage securities, noted Carrick Mollenkamp in The Wall Street Journal. Deutsche lost money in these areas, and also said that “conditions had become significantly more challenging in recent weeks”.
Meanwhile, as the US economy weakens, defaults on credit card, car and corporate debt will rise, and a downturn in Europe would trigger wider credit problems there too. We are hardly out of the woods in terms of the credit crisis, said Octavio Marenzi of Celent. Indeed, “storm clouds are gathering ever more rapidly” over the banking sector, and especially America’s. Enjoy the rally while it lasts.