Wednesday, April 2, 2008

Banks write down billions, shares rise

Deutsche Bank, UBS, Lehman Bros. and Thornburg announce writedowns to boost liquidity amid credit crisis.
Banks, hit hard by the recent credit crisis, are struggling for cash.

Tuesday, four financial institutions announced plans to boost liquidity amid slumping profits and no offers for outside help. It was the latest indication of how far the severe plunge in U.S. housing prices and a credit crisis triggered by rising mortgage defaults has reached.


Swiss bank UBS AG on Tuesday reported more serious damage from exposure to the U.S. subprime crisis, saying it would post first-quarter losses of $12.1 billion and that it would seek $15.1 billion in new capital.

Switzerland' s largest bank said it expects writedowns of approximately $19 billion and announced the resignation of Chairman Marcel Ospel.

UBS (UBS) writedowns have reached a staggering $40 billion in the past nine months, the largest reported by any bank to date.

Standard & Poor's cut the bank's credit rating one notch to AA-, citing "risk management lapses, earnings volatility and need for new capital."

UBS said that after it raises new capital, its Tier 1 capital ratio, a key indicator of a bank's ability to absorb losses, would be about 10.6%. That is well above minimum European requirements of 4% and bank shares rose 8.66% to $31.53.

Ospel said he was ultimately responsible for the bank's health as he stepped down.

"My willingness to stand for re-election for a further one-year term was based on my desire to lead UBS out of its current difficult situation," Ospel said. "We have worked very hard and have been able to address the firm's most pressing problems, thereby laying the foundation for the long-term success of the bank."

The bank said its move to raise capital through a rights issue that would be fully underwritten by four leading international banks and would enable it to remain "one of the world's strongest and best capitalized banks."

"In the first quarter, UBS substantially reduced its real estate related positions through both valuation adjustments and significant disposals," the bank said.

It said it would create a new unit to "hold certain currently illiquid U.S. real estate assets."

"UBS is confident that these measures will deal effectively with the firm's real estate exposures and allow the bank to focus on strengthening its core operations," the statement said.

Chief Executive Marcel Rohner said, "We believe this capital increase and the creation of a vehicle to separate problem assets from the remainder of our businesses will allow us to return to sustainable value creation over time."

He said profits from most of the bank's businesses "remained acceptable in challenging conditions" during the first quarter.

"We have made further prompt writedowns and sales of our impaired U.S. real estate-related positions," Rohner said. "We have reduced risk weighted assets and implemented measures to control costs and strengthen the structure of the firm."

However, he said, UBS wants to avoid selling at "severely distressed levels."

"With these measures we have created the basis to weather one of the most difficult periods in the history of the industry," Rohner said.

The measures show the bank continues to trim risky assets. The bank said its exposure to U.S. subprime mortgage related positions declined to approximately $15 billion from $27.6 billion on Dec. 31.

The exposure to Alt-A positions, which are less risky than subprime loans, was reduced to $16 billion from $26.6 billion, it said.

The efforts at minimizing exposure will be accompanied by an undisclosed number of job cuts and a further tightening of risk.

The measures mean that UBS is now a restructuring stock, analysts at JP Morgan wrote in a note to investors.

"We conclude UBS is aiming to put a line below its risk-exposure problem and refocus on operational business," JP Morgan's Kian Abouhossein said.

But Octavio Marenzi, head of financial consultancy Celent, said the UBS disclosures were "a clear indication that we are not out of the woods yet in terms of the credit crisis."

"Indeed, the storm clouds are gathering ever more rapidly over the banking industry and, in particular, the U.S. banking industry, where most of UBS's losses originated from," Marenzi said.

He predicted the U.S. banking industry is set to see its first contraction in overall revenues in more than forty years. "This will inevitably lead to staff reductions, and we expect to see the U.S. banking industry shed about 200,000 jobs in the coming 12 to 18 months," Marenzi said.

Earlier this year UBS posted a 12.45-billion franc loss for the fourth quarter of 2007, after writing down 15.6 billion francs tied to U.S. subprime mortgages, and said it expected another difficult year ahead.

The bank posted a net loss of 4.38 billion francs for 2007, its first annual loss.

Deutsche Bank

Deutsche Bank AG said Tuesday that it expects first-quarter writedowns of $4 billion due to "significantly more challenging" market conditions triggered by the U.S. subprime collapse.

Germany's largest bank warned last week that it may have been harder hit by the crisis than it had previously announced, with possible losses in some lending divisions.

In a statement issued Tuesday before an address in London by chief executive Josef Ackermann, the bank acknowledged concrete losses for the first time.

"Conditions have become significantly more challenging during the last few weeks," the bank said. "Reflecting this environment, Deutsche Bank anticipates in the first quarter 2008 markdowns in the region of &euro2.5 billion, related to leveraged loans and loan commitments, commercial real estate and residential mortgage-backed securities."

Despite the writedowns, the bank said it expected to stay on its course.

Deutsche Bank (DB) shares fell 0.96%, trading at $112.28.

Octavio Marenzi, head of the Paris-based financial consultancy Celent, said that although Deutsche Bank's losses were not as bad as those suffered by UBS, they were indicative of the severity of the crisis.

"There is little indication that the credit crisis is over and, as a result, a number of banks will be forced to start liquidating their credit positions, putting even further pressure on the market," Marenzi wrote. "For the rest of 2008, the risks for the banking industry are accumulating, especially for those firms, such as Deutsche Bank, with significant exposure to the U.S. markets."

Frankfurt-based Deutsche Bank reported no subprime-related writedowns in the fourth quarter, but said that they totaled $3.5 billion in the third quarter of 2007.

The bank is to publish its earnings for the first quarter of 2008 on April 29.


Shares of Lehman Brothers Holdings Inc. fell almost 3% in after-hours trading Monday, after the investment bank said it would offer up to 3.45 million shares of convertible preferred stock to boost cash flow and reduce debt.

Lehman (LEH, Fortune 500), the fourth-largest U.S. investment bank, will initially offer 3 million shares, and if there is strong demand, underwriters can buy an additional 450,000 shares.

Chief Financial Officer Erin Callan said in a statement the plan will reduce leverage - basically, reduce its reliance on borrowed money. Callan also said there was a "window of opportunity in the market" and "significant interest" from several investors.

Lehman's decision to raise cash through a stock offering arrives just weeks after a cash-flow crisis at Bear Stearns Cos (BSR). that forced the Federal Reserve to step in and fast-track a buyout of the struggling investment bank by JPMorgan Chase & Co (JPM, Fortune 500).

Many of Lehman's shareholders have been anxious. Of four remaining major Wall Street investment houses, Lehman is the most similar to Bear Stearns in terms of size, structure and exposure to mortgage-backed assets.

Shares of Lehman, having finished down 23 cents at $37.64 on Monday, declined another 98 cents, or 2.6%, to $36.66 in after-hours trading following the announcement.

Lehman's first-quarter earnings report earlier this month came in better than analysts predicted. But given the volatility in the credit markets, investors are not yet assuaged that the bank will weather a financial crisis that has so far led to some $160 billion in asset write-downs for the global financial industry.

Lehman itself wrote down $1.3 billion in the third quarter, $830 million in the fourth quarter and $1.8 billion in the first quarter.


Thornburg Mortgage Inc. (TMA) said Tuesday it raised $1.35 billion in an offering as it attempts to keep the company in business and avoid bankruptcy.

Thornburg announced the offering last week. While the capital-raising efforts were viewed by some as a way to provide stability to the company, there was also concern that those benefits could be offset by Thornburg's corporate structure as a real estate investment trust and continued weakness in the mortgage securities market.

REITs are required to pay out 90% of profits to shareholders.

Thornburg said it has received proceeds of $1.15 billion from the offering, with the remaining $200 million put in escrow. That amount will be given to the company once it completes a preferred stock tender offer.

Thornburg plans to use proceeds to satisfy outstanding margin calls.

The offering replaced a previous plan whereby Thornburg tried to raise about $1 billion in convertible notes with an interest rate of 12%. That offering was unsuccessful.

In early March, Thornburg disclosed it has faced nearly $1.8 billion in margin calls since the beginning of the year. The lender said it was unable to meet $610 million in calls, which led it to look for new ways to raise capital.

Thornburg faced a similar round of margin calls in August, but was able to meet them. To top of page

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