Loss Leaders "THIS time it's different" are the four most expensive words in the English language, runs a saying among bankers. So it has proved at Merrill Lynch, an American investment bank which is ruing a stampede into collateralised-debt obligations (CDOs) and other subprime mortgage-linked nasties. Never mind that most of its CDOs were "super senior" and supposed to be relatively safe. On October 24th the Thundering Herd's senior bulls sheepishly announced write-downs of $7.9 billion on Merrill's mortgage holdings, $3.4 billion more than the bank had estimated only 19 days before. This tipped Merrill into loss. After a few days' testy deliberation, the board tipped its chairman and chief executive, Stan O'Neal, through the nearest window. The $161.5m that Mr O'Neal grabbed on his way out will no doubt encourage would-be successors to step forward. But the new boss will be taking over at an unenviable time. The mortgage crisis has done more than $27 billion-worth of damage to capital-markets businesses so far. With the value of subprime securities still falling, that number could rise dramatically when fourth-quarter results are unveiled. Hopes that banks would be able to put the worst behind them in a single bad quarter have been dashed. (...) UBS, the biggest Swiss bank and long regarded as a leader in risk management, gave no better answers than any other institution for calculating the future impact of the subprime crisis when it reported its third-quarter results on October 30th. UBS's investment-banking division lost SFr4.2 billion ($3.6 billion) in the third quarter. The bank's value-at-risk, the amount it stands to lose on a really bad day, has shot up (see chart). On 16 days during the quarter its trading losses exceeded the worst forecast by its value-at-risk model on the preceding day. It had not experienced a single such day since the market turbulence of 1998. In a conference call to discuss the results, Marcel Rohner, UBS's chief executive, and Marco Suter, chief financial officer, struggled to explain the methodology behind their valuation of what seems to be a deteriorating portfolio of subprime securities. Reluctant to give a worst-case assessment of UBS's exposures in future, the best they could do was predict that the investment-banking division would not make a profit in the fourth quarter.
"THIS time it's different" are the four most expensive words in the English language, runs a saying among bankers. So it has proved at Merrill Lynch, an American investment bank which is ruing a stampede into collateralised-debt obligations (CDOs) and other subprime mortgage-linked nasties. Never mind that most of its CDOs were "super senior" and supposed to be relatively safe. On October 24th the Thundering Herd's senior bulls sheepishly announced write-downs of $7.9 billion on Merrill's mortgage holdings, $3.4 billion more than the bank had estimated only 19 days before. This tipped Merrill into loss. After a few days' testy deliberation, the board tipped its chairman and chief executive, Stan O'Neal, through the nearest window.
The $161.5m that Mr O'Neal grabbed on his way out will no doubt encourage would-be successors to step forward. But the new boss will be taking over at an unenviable time. The mortgage crisis has done more than $27 billion-worth of damage to capital-markets businesses so far. With the value of subprime securities still falling, that number could rise dramatically when fourth-quarter results are unveiled. Hopes that banks would be able to put the worst behind them in a single bad quarter have been dashed.
(...)
UBS, the biggest Swiss bank and long regarded as a leader in risk management, gave no better answers than any other institution for calculating the future impact of the subprime crisis when it reported its third-quarter results on October 30th. UBS's investment-banking division lost SFr4.2 billion ($3.6 billion) in the third quarter. The bank's value-at-risk, the amount it stands to lose on a really bad day, has shot up (see chart). On 16 days during the quarter its trading losses exceeded the worst forecast by its value-at-risk model on the preceding day. It had not experienced a single such day since the market turbulence of 1998.
In a conference call to discuss the results, Marcel Rohner, UBS's chief executive, and Marco Suter, chief financial officer, struggled to explain the methodology behind their valuation of what seems to be a deteriorating portfolio of subprime securities. Reluctant to give a worst-case assessment of UBS's exposures in future, the best they could do was predict that the investment-banking division would not make a profit in the fourth quarter.
