Jeremy Warner's Outlook: Markets cheer as Ospel admits reality and falls on his sword at beleaguered UBS
Wednesday 02 April 2008
That great survivor Marcel Ospel, the chairman of UBS, has finally bitten the dust.
This is good news not just for UBS, where the spectacle of Mr Ospel still desperately clinging to the wreckage had become a positive embarrassment, but also for the credit crisis as a whole, for it symbolically marks a point of closure, or as the confusingly named UBS chief executive, Marcel Rohner, called it yesterday, "the end of a long chapter at the end of a long section".
After months of denial, one of the biggest casualties of the crisis has had the sense to take the necessary impairment charge on the chin, recapitalise appropriately, and forced the man ultimately responsible to fall on his sword.
Because UBS has been the largest seller of mortgage-backed securities in recent weeks, and therefore knows better than any what sort of prices they can command, we can be reasonably confident that, this time around, the impairment charge is a realistic one that accurately reflects the full damage.
We've already seen one similarly charged act of surrender in markets with the run on Bear Stearns and its subsequent rescue through a Federal Reserve-backed takeover bid. Capitulation on such a scale tends to mark the nadir of the crisis. There may be more bumps to come, but we certainly now seem to be hitting bedrock.
The surge in markets yesterday, and particularly banking stocks, may seem a perverse reaction to what on any measure was a disastrous set of announcements, yet it was also a wholly rational response for investors primed to expect much worse.
With news of a fully underwritten rights issue to underpin the wealth management business, together with a credible plan for hiving off all the bad debts into a special-purpose, workout, vehicle, it looks as if UBS will now at least survive. The self-fulfiling speculation of just a week ago suggested otherwise.
It is as if a giant meteorite which has been hurtling towards earth, threatening mass destruction, has in the end narrowly missed, allowing everyone collectively to breathe a huge sigh of relief. Nobody would be foolish enough to declare the crisis over. There could yet be smaller satellite rocks still heading in our direction. Even so, the worst may well be over.
This observation should obviously be qualified with the fact that we have been here on at least two occasions before with UBS, only for more damage still to be announced just a few months later.
Only last December, UBS called the bottom by announcing big write-offs and the injection of billions of pounds worth of new capital from sovereign wealth funds. Those same funds must be feeling pretty sick about their investment today. Now they are to be tapped for even more, while the original terms look ruinously expensive.
Mr Ospel says that he had always been willing to accept ultimate responsibility for the mess UBS has got itself into, but he had stayed on because he also wanted to be part of the solution. The job now done, he feels he can go with a clear conscience. I doubt very much whether this is the real story. The surprise appointment of Peter Kurer, general counsel at UBS, as Mr Ospel's successor suggests strongly that it is not.
Rather, this has all the hallmarks of a rushed job with Mr Ospel's head on a platter the only way of securing backing for the rights issue proposed. Over the years, Mr Ospel has proved himself a master of his own board, repeatedly knifing his underlings to secure his own position. Doing the honourable thing doesn't appear to be in his nature.
All that said, it is still not entirely clear that UBS actually needs a rights issue. True enough, the first-quarter write-downs and consequent losses are humongous, resulting in a considerable impairment to the capital base.
Yet even after taking account of these hits, UBS would have been better capitalised than most British banks. What's more, it is as plain as a pike staff that there will eventually be significant clawback from the provisions. In the current climate of fear, markets have hugely overshot in valuing mortgage-backed securities and other debt of questionable value. By putting all this stuff into a separate workout vehicle, UBS hopes to avoid further fire sales at distress prices.
Nor is the outlook for ongoing banking profits quite as bad as the markets suggest. Some previously highly profitable boom areas of banking have been blown away for good, but the widening of spreads also means banks can now charge appropriately for risk, which considerably increases the margin on bread-and-butter banking business.
UBS is raising more capital than it needs for solvency purposes because its hugely valuable franchise in wealth management requires it to be seen as rock-solid reliable. In the circumstances, it is amazing there hasn't been a more substantial withdrawal of funds than that seen. As it is, UBS claims continued net inflows.
There will be more shocks before we are out of the present banking crisis. Meanwhile, the real economy has yet to see the worst consequences of the credit crunch.
But there will be no repeat of the Great Depression, and a severely chastened banking system will eventually emerge largely intact from the rubble. As for Mr Ospel, he's had a better run for his money than he deserved. Having run out of people to throw to the wolves, survival skills even as well polished as his have proved unequal to the task of facing down the American housing slump.
Newton sees life after Harry Potter
There is indeed life after Harry Potter to judge from comments yesterday by Bloomsbury Publishing.
Admittedly, last year's strong recovery in profits owed much to the release of the final Potter book – Harry Potter and the Deathly Hallows – but the affable Anglo-American who runs Bloomsbury, Nigel Newton, insists that the momentum will continue into 2008, with the company still benefiting strongly from the Potter back catalogue, a Deathly Hallows paperback edition, and a wealth of new titles from popular authors partially compensating for the absence of new Potter material.
Not that this positive outlook is reflected in the share price, which, after a calamitous profits setback in 2006, continues to languish at not much more than the level it was at when investors first began to appreciate the Harry Potter phenomenon back in the late 1990s. The stock market doesn't yet buy Mr Newton's story – that he can survive without a constant infusion of new product from JK Rowling.
Yet the evidence seems to point the other way, with a flood of new top-selling authors, most notably Khaled Hosseini, author of The Kite Runner. Nobody expects any of these to match JK Rowling, yet collectively they add up to an incredibly strong roster. With corporate governance concerns now fully addressed, a credible digital strategy and a well-executed push into data and reference publishing, Mr Newton has amply demonstrated that he is more than a one-trick pony.
As the only independently quoted UK publishing house, Bloomsbury enjoys a virtuous circle of publicity for both authors and company. It's a winning formula. Now all Mr Newton has to do is convince the markets of it.
M&S unwilling to surrender over Rose
Having failed to consult or even properly explain over Sir Stuart Rose's elevation to the chairmanship, the M&S board is now consulting furiously. Unfortunately, there is little room for compromise on either side.
The board cannot back off without profound loss of face, resulting in mass resignations including in all probability that of Sir Stuart Rose himself. Shareholders rightly believe there to be an important point of corporate-governance principle at stake, but plainly wouldn't want to risk destabilising the company by forcing such an outcome.
In the end, shareholders may have to settle for the pyrrhic victory of having simply made their point. Nobody is going to risk such damage to relations with the City by trying this sort of thing on again in a hurry. It is a good thing Lord Burns is going. He has profoundly mishandled the whole affair.
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