The Swiss bank UBS said it has sold more than 10 percent of itself to Asian and Middle Eastern investors to raise cash amid a balance sheet meltdown caused by huge losses on securities linked to U.S. mortgages.
UBS said it is taking a $10 billion write-down to cover the bleeding, making it the hardest hit European financial institution in the spreading crisis that originated in the U.S. mortgage industry. Monday’s announcement followed a separate $3.7 billion write-down at the end of October, also because of losses on U.S. mortgage-backed securities. And the bank reversed its fourth-quarter forecast, saying it expects to lose money for the period and possibly the year.
As global banks tally their losses from the imploding mortgage-backed market, they face an urgent need to raise substantial amounts of money to repair their balance sheets. So they are turning to the deepest pockets in global finance, government-run investment funds prowling for higher returns.
Known as sovereign wealth funds, the accounts manage $1.9 trillion to $2.9 trillion in foreign exchange reserves, according to the U.S. Treasury Department. That’s already more money than hedge funds or private-equity investors control, and Morgan Stanley estimates the sovereign funds could balloon to $17.5 trillion in 10 years, fueled by high oil prices and Americans’ addiction to inexpensive Asian imports.
“They are continuing to expand and grow and invest,” says Ted Truman, a former International Monetary Fund economist who has studied the funds.
To rebuild its deteriorating financial position, UBS Monday said it had sold a 9 percent stake to the Government of Singapore Investment Corp. for about $9.8 billion and a 1.5 percent stake to a strategic investor from the Middle East, whose identity was not disclosed.
On Nov. 26, Citigroup, the largest U.S. bank, said it will raise $7.5 billion by selling a 4.9 percent stake to the Abu Dhabi Investment Authority, owned by the government of the United Arab Emirates.
“The managers of sovereign wealth funds think it’s a good deal. They see the financial sector, if not hitting bottom, is near bottom and they’re going in for the long term,” says Truman, now at the Peterson Institute for International Economics.
Amid the continuing credit crunch, bank stocks are getting cheap. This year, the KBW bank index is down 15.6 percent. The index, which tracks 24 national and regional banks, trades at a price-earnings ratio of 11.6, significantly less expensive than the market as a whole. The Standard & Poor’s 500, for example, trades at a P-E of 18.9. (P-E is a company’s price divided by earnings.)
Vincent Reinhart, a former Federal Reserve Board economist, says additional deals are likely. Banks have publicly announced only a fraction of the estimated total of $200 billion to $400 billion in mortgage-backed red ink, he said. “That means large losses (are) remaining on financial institutions’ balance sheets,” he said. “And that suggests the need for capital.”
