It looks like the worst of the mortgage meltdown is far from over for the big banks. In a surprise warning today, UBS announced that it would post a record $4 billion full-year loss for 2007, and that it would have to make larger mortgage-related write-downs for the fourth quarter than it had expected. The bank, one of Europe’s worst hit by the sub-prime-mortgage crisis, said it would write-down another $14 billion in securities, $4 billion more than it disclosed in December.
One of the most troubling parts is this: Only $12 billion of UBS’ latest write-down is related to sub-prime mortgages, the bank said, with the other $2 billion linked to the troubled monoline bond insurers. (The bank said that details about these holdings would not be published until February 14.) It’s not a huge surprise. Many have worried that banks’ exposure to the monoline insurers (like MBIA, AMBAC Financial and ACA Capital Holdings) would result in further write-downs, but the UBS announcement offers confirmation.
There will probably be more to come. Oppenheimer analyst Meredith Whitney last night downgraded Merrill Lynch, saying the firm could face additional write-downs of up to $10 billion if some of the bond insurers are downgraded. During the second half of 2007, Merrill wrote down about $24 billion, mostly linked to sub-prime-mortgage securities. Regulators have been trying to cobble together a bailout of the bond insurers to prevent further meltdown in the financial system, but such a bailout may cometoo late—if at all.
For the full year, mortgage-related losses at UBS have totaled about $19 billion, the company said. UBS’ enormous losses have precipitated calls for the bank to spin-off its investment bank, and focus on the highly profitable wealth-management division.
Last month UBS received an emergency capital injection from Singapore and an unidentified Middle East investor. Other firms have gotten similar emergency capital infusions to keep their credit ratings intact. In all, the banking industry has written down over $100 billion related to mortgage securities.