Remember that elusive rumour about UBS flogging its Alt-A portfolio. As the story bounced around the markets in March, UBS had supposedly sold more or less the entirety of its Alt-A portfolio to bond investor Pimco. The scary part was that, according to the whispers, the portfolio had been sold at 70 cents on the dollar, well below where it was being valued only a few weeks before.
The first glimpse at how UBS fared in the first quarter suggests that something did indeed happen within its Alt-A book. Subprime-related positions were reduced from $27.6bn to $15bn, a cut of about 55 per cent which could easily have come through straight writedowns. But Alt-A fell from $26.6bn to just $16bn, a 40 per cent drop. As the statement says:
These developments are the result of asset disposals as well as the effects of further writedowns.
With $19bn in total writedowns, it’s fair to say the bulk of the reduction came from the latter rather than the former. Assuming that the subprime writedown totalled close to the full $12.6bn, that leaves another $6.4bn to play with. How much of that could conceivably have hit Alt-A? We haven’t seen more than token efforts to write down banks’ Alt-A portfolios thus far – Lehman Brothers, for example, actually increased its “prime and Alt-A” holdings from the end of November to the end of February. Deutsche Bank nevertheless on Tuesday ominously suggested that alt-A, among other things, might be the next shoe to drop.
Such a severe markdown by UBS on its Alt-A would be an outlier, suggesting that it has succeeded in shifting some of its exposure which so surprised investors when it was revealed in the 2007 results. The best investors can probably hope for is another relatively heavy writedown on the bank’s second-lien and non-AAA exposure, which amounted to about $5.4bn at the end of the year, and a modest chunk of the better stuff having left via the back door.
Pimco initially dismissed the tale back in March as an “exaggeration” before coming out with something more categoric in the way of a denial. And it always seemed unlikely that the bond house was going to pile a significant chunk of its assets into one trade. Someone though, seems to have been rummaging through UBS’s clearance bin.