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Risk concentrations
Market developments
The area of UBS most severely affected by the progressive market dislocation during 2007 and first quarter 2008 continues to be the fixed income, currencies and commodities (FICC) business of the Investment Bank, which has exposures to US residential mortgage markets and other asset-backed securities in a number of portfolios. US mortgage markets deteriorated further in first quarter 2008, driven by increasing homeowner delinquencies and exacerbated by fears of a US recession, which contributed to an acute lack of market liquidity across the whole sector. Prices of US municipal and asset-backed securities were affected by uncertainties about the financial state of monoline insurers, and contagion spread more broadly beyond the US and to other securitized credit markets which had not been significantly impacted in prior periods. During first quarter 2008, the values of UBS's positions in US residential mortgage-backed securities (RMBSs) and super senior RMBS collateralized debt obligations (CDOs) were subject to further significant writedowns, and other asset-backed positions, most notably those backed by US student loans, also lost value. Further credit valuation adjustments were also taken against credit default protection purchased from monoline insurers.
| US residential mortgages - classification of related securities |
During first quarter 2008, UBS comprehensively reviewed its classification of US residential mortgage-backed securities (RMBSs) in order to ensure consistent allocations to sub-prime, Alt-A and prime. It is important to note that there is no agreed industry-wide definition that allows RMBSs to be classified and a certain degree of judgment is inevitably required, especially for securities with limited data regarding the underlying mortgage population. The review focused on the following factors: - classifications by external data providers which UBS assessed as reliable; - known characteristics of particular issuers of the securities (also known as "shelves"); - the quality of the borrowers represented in the underlying mortgage pools, as measured by the scores provided by the Fair Isaac Credit Organization (FICO); and - other characteristics, including the prevalence of mortgages with high loan-to-value (LTV) ratios. The classification is now based on the following criteria: - RMBSs were classified as sub-prime when data providers labeled the securities as "home equity", when average FICO scores fell below 660 or when the issuer is considered a sub-prime issuer by market participants. When the primary criteria did not provide a definitive classification (for example, due to lack of available information on FICO scores), other characteristics were used, including information on the prevalence of loans with high LTV ratios (above 80%); - RMBSs were classified as Alt-A when data providers labeled the securities as "Alt-A", when the FICO score was 720 or below (but not below 660) or when the issuer is considered an Alt-A issuer by market participants; and - RMBSs were classified as prime where none of the conditions for classification as Alt-A or sub-prime were met. As a result of this review, at 31 March 2008 an additional USD 1.7 billion were classified as Alt-A positions and an additional USD 0.1 billion were classified as sub-prime. Also, positions of USD 1.6 billion were no longer classified as prime. Had UBS applied the same classification in fourth quarter 2007, the positions in Alt-A and sub prime would have each been approximately USD 1.0 billion higher on 31 December 2007, and prime positions would have been USD 2.3 billion lower. |
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Products and services in these webpages are not available for US persons, for the exclusion of residents of other nations see the disclaimers relating to the actual services.
© UBS 1998-2008. All rights reserved.
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