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UBS Earning Get Kicked In The ARS! U.S. Wealth Mgt Unit Profit Wiped Out By ARS

UBS announced a fourth quarter loss of U.S. $7.5 billion today, capping a horrendous year for the Swiss firm.

UBS announced a fourth quarter loss of U.S. $7.5 billion today, capping a horrendous year for the Swiss firm. Its Wealth Management U.S. division, despite raking in rival FAs in the fourth quarter, posted decidedly mixed results. Quarterly and annual results were bedeviled by auction-rate securities (ARS) charges that dragged a pre-tax profit into the loss (pre-tax) column.

For the year, the bank realized a pre-tax loss of $18.5 billion. (All figures are in U.S. dollars. Since the company reports in Swiss francs, we used the conversion rates prevailing on the last day of the quarter described.) Nearly $4 billion of the loss stemmed from a charge related to mandatory convertible notes that were issued to the Swiss government. Unhappy clients yanked more than $110 billion of their assets from UBS accounts worldwide during the year—$54.5 billion in the fourth quarter alone. The fourth-quarter and full-year pre-tax losses are largely attributable to risky bets in fixed income, currency and commodities areas of the investment bank, according to the firm.

UBS management clearly wants to put the past two years behind it, and accompanied the earnings announcement with structural changes it is making in light of "market conditions and the changing environment." The investment bank, despite its despicable performance and source of the bank's pain, will not be spun-off as many critics of the firm have called for. It remains a "core" business at the firm, but its role and ability to take risk will be greatly diminished: "The investment bank has made substantive progress in de-risking and de-leveraging its balance sheet and its overall structure has been greatly simplified," says the release.

Wealth management will be the focus of the firm going forward. To reflect that, management announced the creation of two new business divisions: Wealth Management & Swiss Bank, which includes all non-American wealth management businesses as well as the Swiss private and corporate client business; and Wealth Management Americas, which will continue to be run by Marten Hoekstra and focus on "gaining scale and market share." CEO Marcel Roehner said, "The formation of the two new divisions will help to rebuild our reputation and recognition." Like many of its Wall Street peers, UBS' reputation has been damaged by the consecutive write-downs and losses as well as the auction-rate securities debacle. (The firm's reputation continues to take hits as the IRS widens its investigation of the firm's alleged role in helping some 19,000 wealthy Americans hide $20 billion in taxable income overseas.)

The focus on wealth management would appear to quell the recent merger rumors around Hoekstra's division. Indeed, Wealth Management U.S. provided the one bright spot in the quarterly earnings by bringing in $3.8 billion in net new client assets during the quarter. The fourth-quarter reversal of client asset outflows in the second and third quarters can be attributed largely to the firm's aggressive recruiting campaign in the fourth quarter that brought in more than 200 new FAs from its disgruntled wirehouse peers. The total number of UBS FAs jumped to 8,182 from 7,908 in the previous quarter. Bolstering ranks couldn't prevent a pre-tax quarterly loss of $319 million, a loss the firm says was caused primarily by a $566 million charge related to settlements pertaining to auction-rate securities (ARS). The unit recorded a full-year pre-tax loss of $653 million, compared to a profit of $594 million in 2007. "Driving the decline were the combined ARS-related expenses and trading losses of total CHF 1.5 billion taken during 2008," says the release. To view the official UBS release, click here.

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