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The UBS horror show

• Robert Peston
• 10 Dec 07, 10:11 AM

On October 1, UBS losses from sub-prime would wipe out third quarter earnings but the giant Swiss bank was very confident it would make a substantial full-year profit.

Just over two months later, that annual profit has been consumed by the sub-prime inferno.

A on investments linked to the dodgier end of the US housing market is a humiliation for the pride of the Swiss financial system.

After all, this is a bank whose great claim has always been that it is more conservative than its rivals.

So the sub-prime write-down represents more than a monetary loss for UBS. It’s a serious blow to a valuable brand – which had already become tarnished by the way it was burned a decade ago in the last great money-markets debacle, the collapse of the giant hedge fund, .

That UBS has felt the need to raise a staggering $17bn of new capital is all you need to know about the gravity of what has occurred, both for UBS and for the world financial system.

If you want perspective on that, note that Northern Rock requires about $1.5bn to $2.5bn of new capital for whatever reconstruction will turn out to be its ultimate fate.

On that measure, the Rock’s plight doesn’t look quite so appalling.

UBS isn’t – of course – being propped up by the Swiss government.

However it has been bailed out by another sovereign state, Singapore – whose investment arm, the , is providing more than half of UBS’s new capital.

It is not cheap money from Singapore either. UBS is paying 9% a year for up to two years, until the new convertible notes are converted into shares.

Admittedly that is a bit less than the 11% being paid by Citigroup for the $7.5bn it raised from the .

But all that tells you is that Citi’s problems are even worse than UBS’s.

That UBS should have to pay near junk-bond rates to shore up its balance sheet is quite extraordinary.

What does it all mean?

First, it’s further evidence of the transfer of financial power from the Western economies to the great cash generating economies of Asia, Russia and the Middle East – which are able to dictate the terms on which they prop up our important institutions.

Second, if there is a price paid specifically by UBS and its shareholders, we are also all paying for the foolishness of that bank and its peers.

They are now ruled by fear, they are pushing up the price of the credit they provide to us, and we will all feel poorer.

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