Neil Unmack

Neil Unmack’s Profile

Losses slow on UBS’ dodgy assets

August 4, 2009

Losses seem to be slowing on the 26 billion swiss francs of leveraged loans, asset-backed debt and other exotica UBS shifted last year from its trading to its loan book to avoid having to mark them to market.

UBS, Deutsche and other European banks made good use of this accounting trick introduced in October to avoid taking losses on volatile assets. The justification was that market dislocation exaggerated the assets’ true risk. Of course, it was only a temporary dodge asĀ assets still have to be written down over time as borrowers default or forecast cashflows decline.

UBS’s second quarter results are encouraging. Credit losses on the reclassified assets fell to 208 million swiss francs, down from 565 million in the first quarter and 1.3 billion at the end of last year.

There is a downside to avoiding marking the assets to market. As the assets were already booked at prices above their market levels, UBS missed out on 1.3 billion swiss franc gain in the assets’ fair value in the second quarter. Still, that’s small beer compared to the 1.2 and 4.2 billion losses it would have taken in the first and fourth quarters had it not reclassified them.