Swiss banking giant UBS
Banks insured small portions of their debt portfolios to hedge against potential declines in the housing market. But with no market demand for debt, and insufficient reserves in place, the monolines are increasingly exposed to potentially massive losses themselves.
As the banks struggle to bring complicated debt portfolios onto their balance sheets, even these insured debt products must be sold at a loss. So yesterday, UBS introduced the monoline writedown as the latest creation of a financial sector that has pelted investors with a dizzying array of new concepts and parameters to consider.
UBS reported its first-ever annual loss after a truly dismal quarter, in which $11.28 billion disappeared at the stroke of a pen. The monoline charge was only $871 million, less than 5% of the $18.4 billion they've written off to date. As the first of its kind, however, the writedown begs the question of how many more will follow it.
That's true both for UBS and its beleaguered U.S. counterparts, such as Merrill Lynch
Not Ben Bernanke, not investors, and not the banks themselves seem to have a handle on how contagious this subprime virus will be. After mutating into the monoline strain, we're watching the horizon for the rumored commercial real estate flu or municipal bond fever. Like the common cold, though, there appears to be no cure ... it just has to run its course. Investors might do well to keep the banks in quarantine a while longer.