It's A Deal

April 1, 2008

Reality Check

I keep reading about how UBS’ plan to form a separate unit to hold its garbage is such a good idea, and frankly, I don’t get it.

I mean, I understand the concept, I just don’t see how it changes anything. In a nutshell, UBS will push to the side most of its assets tied to the US residential real estate market, in an effort to separate the junk from the businesses that are performing well (or at least better).

Now, if I were running a bank that just preannounced a $12 billion first-quarter loss, the write-down of another $19 billion in bad subprime debt, and the need for another $14 billion or so in capital, then I, too, would get as creative as I could to try to make this disappear.

Heck, after hearing this plan, I might just go home, create a neat little pile of bills that need to be paid, and simply bury them in a drawer. There, problem solved. Alas, GMAC and Verizon aren’t going to go away because I’ve holed them up in some “pay” or “don’t pay” vehicle. I may fool myself, but it won’t get past the wife, and UBS’ plan won’t get past its would-be investors.

The argument is that, with the bad stuff out of the way, the bank’s “readability” will be greatly improved. Without all the clutter, investors will have a better idea of what’s going on. I see it just the opposite way; leaving that toxic waste in place – confusing as it is to decipher -- is the perfect way for investors to see the bank for what it is right now: a mess. 

Of course, there’s plenty of talk now in the analyst community that, because this is such a good idea, other banks that have been brutalized by the subprime chaos should do something similar. Brilliant.
 
Wall Street’s one of the most creative places on earth; that’s part of what makes it great. But as we’ve seen in the past nine months or so, creativity, when abused, can bring with it harrowing consequences. The time now may be for a bit lees creativity and a bit more reality.