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Caution as UBS deal gives boost to markets

By Chris Hughes in London and Michael Mackenzie in New York
Tuesday Apr 1 2008 16:05

Leading bankers cautioned against calling a premature end to the credit crunch on Tuesday as markets rallied sharply after a new round of bank writedowns and capital-raising fostered hopes the crisis had reached its nadir.

The rally was led by UBS (NYSE:UBS) , which closed up 12 per cent at SFr32.40, after the Swiss bank said Marcel Ospel, its chairman, was standing down in the wake of $19bn of new writedowns and a plan for a SFr15bn rights issue.

The bank also intends to package its exposure to troubled subprime mortgage assets into a separate entity.

Investors saw the moves as evidence that banks were finally facing up to their challenges and welcomed the writedowns as a benchmark for sizing up problems across the rest of the sector.

They also took comfort in the fact that the rights issue is to be underwritten by BNP Paribas, Goldman Sachs, JPMorgan and Morgan Stanley, all of which had conducted due diligence on UBS's numbers.

The first day of the new quarter saw the S&P 500 close up 3.6 per cent at 1,370.18 points led by financials - its best day since a rise of 4.2 per cent on March 18. In London, the FTSE 100 was up 2.6 per cent, while the FTSE Eurofirst 300 rose 3.1 per cent.

Other banking stocks moved higher in sympathy, including Germany's Deutsche Bank (NYSE:DB) , which closed up up 3.9 per cent in spite of a warning of €2.5bn of new writedowns.

Lehman Brothers (NYSE:LEH) , the Wall Street bank, rose 17.8 per cent to $44.34 after increasing the size of Monday's $3bn capital raising by $1bn.

Investors also reduced their exposure to commodities and safe havens including government debt and gold, which fell to $880 an ounce, a two-month low.

But senior bankers said the rebound was driven in part by hedge funds closing short positions and warned that UBS had negative implications for the rest of the sector.

Marcel Rohner, UBS's chief executive, said the market was wrong to infer too much from UBS's situation.

"We will need a few days and weeks to understand the broader significance of where we are," he said. "One institution alone will not be sufficient to judge."

Daniel Zuberbühler, director of the Swiss Federal Banking Commission, conceded the UBS was "in first place" in terms of write-downs among European banks and cautioned: "But let's wait and see."

Analysts expect Merrill Lynch and Citigroup (NYSE:C) , the two other banks most hurt by the market turmoil, to take additional provisions when they report results in the next few weeks.

Additional reporting by Peter Thal Larsen in London, Haig Simonian in Zurich, and Aline van Duyn and Ben White in New York


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