Report on UBS’ $37 Billion Writedown

Kids, we have some fascinating reading in store for you this weekend.

The "conservative" Swiss banking giant UBS — and I put that in quotes for obvious reasons — wrote down a previously unimaginable $37 Billion dollars. Their shareholders were (ahem/cough) quite perturbed. So the nice folks at UBS, with an assist from KPMG, put together a 50 page report detailing the hows and whys UBS took such a humungo hit.

For what you would expect to be a dry report, it is absolutely compelling reading. It explains much more than the subprime fiasco. The report implies that management didn’t really understand what the hell they were getting into with their purchases of Warburg/Dillon Read Capital Management. This unit eventually became UBS’ internal hedge fund (it has since been shut down).

I wonder if management ever truly understands the nuts and bolts of these large acquisitions. We will find out if JPM knew what they were getting into getting the Fed into with the Bear Stearns (BSC) acquisition.   

The report includes an indictment of the firm’s compensation packages. The current structure — big salaries and bigger bonuses — encourages the riskiest and most short term of strategies. Prudence, risk management, and long term thinking were not money makers for employees. When the time came for the company to take its writedowns, many of these bad actors were long since gone.  Go on, take the money and run.

You may not be surprised to learn that external consultants were involved and recommended "streamlining of risk processes." I don’t know if these unnamed consultants were McKinsey & Co., but the whole description has a faint Enron-like smell to it.   

A few other questions arise from the report: 

Why do very risky strategies seem to end up in Fixed Income ?

How did Risk Control fail so badly?

Why was there an "Absence of risk management" and "Incomplete risk control methodologies" ?

Who created these compensation system ?

Again, this is just the tip of the iceberg in terms of asking what went wrong.

I wonder if this the inevitable banking equivalent of the Minsky moment. Perhaps these megabanks are simply too big, too unwieldy to be appropriately managed as hedge funds, rather than sleepy conservative banking institutions.  The perverse incentives encourage reckless behavior.

Fascinating stuff . . .



Shareholder Report on UBS’s Write-Downs
18 April 2008

UBS ShareholderReport.pdf (download)


A good name sliced, diced and traded
John Gapper
FT,  April 24 2008 03:00 | Last updated: April 24 2008 03:00

How UBS came undone
Roderick Boyd
Fortune, APRIL 23, 2008: 4:38 PM

Too many risks, too few controls, says UBS report on write-downs
David Gow in Brussels
The Guardian, Tuesday April 22 2008

Category: Corporate Management, Credit, Derivatives, Finance, Fixed Income/Interest Rates, M&A

Friday Evening Jazz: Dexter Gordon

FNJ has a guest DJ tonite: BondDaddy is in the house!

Dexter Gordon is one of the greatest tenor sax players. He had a strong tone and incredible sense of melody. Some players like Sonny Rollins and Joe Henderson had a slippery sense of time; their phrases speed up and slow down, moving within the rythm section’s accompaniment. Not Dexter. Dex’s time was rock solid, never wavering. The rythm section had to accompany his time.

Our_man_in_parisHis playing is incredibly melodic, easily followed by the listener. Ideas naturally morphed from one to the other, always following a logical pattern. However, he was also able to surprise listeners with a run into upper chordal extensions.

His playing provides a logical link between Parker and Coltrane. Dex used many ideas from Parker, but played them with a tone that was deep, bold and soulful.  His tone provides the link to Coltrane, who also favored a deep and rich tenor tone.

Gordon swung — and swung hard. If your feet are not tapping within 8 bars of his starting to play, you’re just not listening.

Our Man in Paris:
This be-bop session is a meeting between three of the most influential
musicians of the forties. The rhythms crackle, the solos fly; Our Man
In Paris is essential Dexter. A nice compilation of standards.

HomecomingHomecoming: Live at the Village Vanguard. Dex lived in Amsterdam for about 10 years, and this was the album be made when he came back. Very cool set. Woody Shaw is on Trumpet, and the two work really well together. THis is Dexter at the very top of his game (and probably one of the top 25 live jazz albums of all time).

He also starred in the Round Midnight, probably the best jazz movie ever made

Go:  Its been widely reported Gordon himself considered this his greatest achievement. Brimming with conviction and poise, Gordon’s gentle-giant sax carries itself with a sort of graceful edge that is difficult to emulate. Never has anyone made the diminished scale sound so musical.


Ballads: This is a compilation of his ballads (duh), and he could play just beautifully on these. Gordon delivers his almost sleepy and smoke-filled solos with real grace. Some of the most romantic playing you will every hear.



Videos after the jump


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