Carrick Mollenkamp | April 03, 2008
STOCK markets have shot higher after two financial firms at the centre of investors' worries took steps to shore up their capital and put the credit crisis behind them.
But bankers warned the industry was not out of the woods yet.
Switzerland's largest bank, UBS, which had written down $US18 billion ($19.8 billion) in troubled investments, said it expected to add another $US19 billion to the total.
But UBS also said it would raise $US15 billion in new capital from its shareholders.
And, in another move that pleased some investors, UBS said it would replace its chairman.
Meanwhile, Lehman Brothers, which has battled rumours that it was on the ropes, said that investors had lined up to give it more capital.
The Dow Jones Industrial Average rose 391.47 points, or 3.2 per cent, on the news, which also pushed other markets higher.
UBS's stock gained nearly 15 per cent, while Lehman's jumped almost 18 per cent.
Still, the rally, which was also driven by investors looking to put money to work on the first day of the quarter, only brought the market back to where it was a month ago.
And credit markets remained frozen despite the efforts of central bankers to get banks to start lending again.
The coming first-quarter earnings season is expected to bring yet another wave of billion-dollar write-downs by financial firms.
While banks' results remain tough, they are starting to produce fewer surprises.
The UBS write-down has been expected for weeks, as was a $US3.9 billion write-down announced by Deutsche Bank.
In previous quarters, investors were blindsided by the losses.
UBS chose Peter Kurer, its top in-house counsel, to succeed Marcel Ospel, who has been chairman since 2001 and was the architect of the investment-banking business that landed UBS in trouble.
To rebuild its cushion against further losses, UBS is seeking shareholder approval to raise $US15 billion by selling new shares to existing shareholders in a so-called rights issue.
"Our firm turned a page today at the end of a bitter chapter," said Marcel Rohner, chief executive of UBS. "We will return our company to profitability."
The surge in UBS shares could reflect takeover speculation, but the list of potential buyers is limited, as few banks have the resources to make such an acquisition. UBS's market value is about $US68 billion. The nature of UBS's losses suggests more to come elsewhere.
They show that March was a bad month for the values of complex debt securities known as collateralised debt obligations, or CDOs - a sign that US banks that competed with UBS to sell mortgage-backed CDOs could be facing larger than expected first-quarter losses.
Analyst William F.Tanona at Goldman Sachs has projected that Citigroup will take a $US12 billion hit and Merrill a $US2 billion hit on the CDOs alone.
Merrill has already raised $US13 billion in new capital and Citigroup $US30 billion since the crisis began.
Mr Tanona said the losses might mean the two firms would need to raise even more cash.
Both the US Federal Reserve and the European Central Bank have made tens of billions of dollars in added loans in recent weeks, including an extra E35 billion from the ECB on Tuesday.
And bankers in Britain are pushing the Bank of England to help them unload hard-to-sell mortgage securities by accepting them as collateral for loans of government securities - a move the Fed has already made in the US.
Both UBS and Deutsche Bank said market conditions deteriorated in March. "Conditions have become significantly more challenging during the last few weeks," Deutsche Bank said.
Simon Adamson, a credit analyst at research firm CreditSights in London, said: "For European banks, the first quarter is going to be even tougher than we perhaps thought it was going to be.
"You are going to get a lot of negative news potentially over the next few weeks."Some investors welcomed the UBS write-down news.
"Sadly, write-downs of that size had to be expected. We're relieved that it is out in the open now and hope there won't be any more," said Herbert Braendli, president of Profond, a Swiss pension fund that had been pushing for a capital increase.
"If there aren't any more write-downs, the capital base should be sufficient now."
Other investors could be interested in buying the whole bank as a way to gain access to its lucrative private wealth-management business. But the Swiss central bank is likely to stop the country's top bank being taken over.
Additional reporting: Edward Taylor, David Enrich and Robin Sidel