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UBS shapes deal to shed subprime debt

Ashley Milne-Tyte May 22, 2008

UBS shapes deal to shed subprime debt

Ashley Milne-Tyte May 22, 2008


KAI RYSSDAL: Much like car companies, big financial institutions have seen better days. The subprime mess led the Swiss bank UBS to a disastrous first quarter. UBS lost $11 billion due mostly to its investments in mortgage-backed securities. The trend has been for banks to do what they have to to get those securities off their books. But there are firms that think they’ll eventually be worth something again.

Today UBS did a deal with one of them. It sold $15 billion-worth of mortgage-backed securities to BlackRock, the asset management firm. And this is going to sound a little nuts here but UBS is going to lend BlackRock more than $11 billion to make sure that sale actually happens.

From New York, Ashley Milne-Tyte explains.

ASHLEY MILNE-TYTE: UBS needs money. Now. That’s why it’s selling the loans at a deep discount. They used to be worth $22 billion.

Benjamin Wallace is a securities analyst with Grimes & Company. He says BlackRock is happy to take on that debt and bide its time.

Benjamin Wallace: Because BlackRock’s not in a distressed situation, they can afford to wait for the values to come back. UBS is in a more-stressed situation and they’re just looking to mitigate risk.

Wallace says in exchange for its risky mortgage-backed debt UBS is taking on an $11.25 billion loan to BlackRock. And BlackRock’s a much safer bet.

Bert Ely is a banking consultant. He says BlackRock could really cash in by buying all these securities. He says their value could easily rebound.

BERT ELY: Now it may take a few years for that profit to be earned — some of it will come sooner rather than later — but while this is a high-risk investment, it also promises some very high returns.

UBS isn’t the only bank looking to offload subprime debt. Christopher Whalen of Institutional Risk Analytics says we can expect to see more deals like this one.

Christopher Whalen: I do not expect valuations for these securities to bounce this year. It’s very hard if you’re a distressed seller and you have to go out and deal with aggressive buyers to get a good price.

Ironically, that’s good news for the people who designed these Byzantine products, many of whom have lost their jobs. Banks like UBS will need them to work out just how much these assets are worth.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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