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Banks face long haul in subprime cleanup

Global banks are going to take far longer than previously imagined to clear debris left by a receding tide of U.S. subprime mortgages which has played havoc with balance sheets.

"The current environment situation will continue for quite a long period of time, a lot longer than perhaps anybody felt a few weeks ago," said Alex Wilmot-Sitwell, global co-head of UBS Investment Bank. "Banks are really struggling to come to terms with unwinding the extent of potential write-offs," said Wilmott-Sitwell.

Banks in North America and Europe have taken charges running to billions of dollars on holdings on mortgage-backed securities which have been decimated by a meltdown in subprime mortgages - loans extended to borrowers with shaky credit histories. Even though UBS has been one of the casualties of the crisis, taking 4.4 billion Swiss francs of charges which forced it to report a third-quarter loss, its investment banking business is thriving in other areas, said Willmot-Sitwell. "We are enjoying an unbelievable year, we see our business achieving 40 percent growth year-on-year and we see ourselves finishing in third position in terms of investment banking," he said.

UBS Chief Executive Marcel Rohner last week warned that the bank faced further writedowns on its subprime-related exposures in the final quarter. As a result, he said, the investment banking unit was unlikely to break even. If the preeminence of the United States in the world economy is diminished by the credit crunch, then UBS would be better placed than most to prosper from the rise of emerging markets because of its strong presence there, he said.

The crisis has also set off a chain of boardroom upheavals as chief executives of global banks are called to account for huge writedowns on their securities portfolios, resulting in quarterly losses in some cases. The latest casualty was the head of Citigroup, Chuck Prince, who stepped down on Sunday after the bank said it might suffer an $11 billion writedown for subprime losses, on top of $6.5 billion it wrote off three weeks ago.

Wilmot-Sitwell said he wondered whether banks were always doing the right thing by ejecting chief executives when their business ran into trouble. A lull after a first round of writedowns by banks in August had turned out to be temporary and a new subprime storm of even greater ferocity had been unleashed.

The disappearance of a liquid market for the securities underlying the parcels of mortgage-backed debt that many banks are holding was proving a severe challenge. UBS, which reported its first quarterly loss last week in five years after taking 4.4 billion Swiss francs of writedowns, has said it is likely to have to make further writedowns in the final quarter of the year.

But the effect of the crisis in the U.S. residential mortgage market on the economy was a greater worry than any damage that had been inflicted on banks' balance sheets. "The long-term impact on the balance sheet is not the major issue. A much bigger issue is the fallout of the residential mortgage in the U.S." said Wilmot Sitwell.

He also sees Asian banks as being in a position to take advantage of a crisis which has mainly engulfed U.S. and European financial institutions although the ascent of Asian finance is likely to be gradual. "I don't see immediately some mass switch of asset value and power from the U.S. and Anglo-Saxon old powers to India and China. It's going to happen over decades not over a few weeks."

Source: Reuters
Date: 06.11.2007 [133]

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