Have We Avoided A Banking Calamity?
An appalling set of results from UBS has convinced the markets that the only way is up.
It looked like a classic April Fool's Day trick. The Swiss bank UBS confirmed it had written down a further $19bn in subprime-related assets, bringing its total to around $40bn and propelling it to the top of the writedown league table. It fired its boss, Marcel Ospel – once one of the most respected names in banking – announced a $12bn first-quarter loss and unveiled a $15bn emergency cash-call.
Yet shares in this former paragon of excellence shot up 12% – and stock markets worldwide swiftly joined in the celebrations.
Confused? You should be. The markets in their wisdom have decided that this catalogue of disasters is tip-top news. The theory traders were working on was that UBS was no longer in denial; that its kitchen-sink job marks the nadir of the subprime fallout and that, from here, the only way is up.
It certainly seems a perverse reaction to what was undoubtedly a disastrous set of announcements, yet this was a wholly rational response for investors primed to expect much worse. The bank's continued existence seemed to hang in the balance; it looks now as if it will at least survive.
It is as if a giant meteorite, which has been hurtling towards Earth, threatening mass destruction has... narrowly missed, allowing everyone collectively to breathe a sigh of relief. We've already seen one act of surrender in the markets with the run on Bear Stearns. There may be more bumps to come, but we now seem to be hitting bedrock.
The problem is that UBS's new dawns are beginning to feel like Groundhog Day. The same might be said of predictions that the worst is over. There is, however, no sign of a let-up in the bad news coming out of America, and no reason to believe we've seen all the bad debt losses accounted for. Meanwhile, house prices in Britain are falling and good mortgage deals are ever harder to come by.
First Direct gave the markets just five hours notice that it was pulling out of offering mortgages to new customers completely. The HSBC-owned bank insists the withdrawal is a "temporary measure" because it is swamped with demand. But "Bank pulls out of mortgage market" makes a scary headline and, while it may be the first, it certainly won't be the last.
Even if the beginnning of the end of the subprime crisis is now in sight, its consequences are only just beginning to bite on the real economy.
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