It would be presumptuous on my part to pretend that the disastrous UBS saga of the last eight months can be dealt with in a single article. Any serious investor should consult all the Financial Times and The Economist articles of the last eight months on the subject and to form his or her own opinion of UBS solvency.
Do not believe that an opinion about any bank's solvency can be garnered from its balance sheet alone. Banks are still allowed, according to international regulations, to take off-balance sheet risks, that is, risks connected with the re-packing of mortgages, especially those traded round the world. The practical financial outcome has proved to be that it is now impossible to form a correct estimate of any bank's financial position.
In none of the articles is there an indication of the extent of the rot at the heart of UBS which is now weighed down by $42 billion in subprime losses. A run on the bank is also going on. It is true that at one time the Financial Times did call UBS a bank "rotten to the core", but never did it give evidence of monitoring the extent at which its wealth management money was being withdrawn. The FT, will, of course, try to always throw oil on troubled waters but it performed.
It was, however, left to Bloomberg which on Monday repeatedly reported on its screen the fact that money was being withdrawn from UBS. We now know that these withdrawals amounted to $42 billion in just the second quarter.
'Malfeasance', that is wrong doing in a position of trust, has been at the root of present world financial troubles. The FT has put it that the 'Big Freeze' will not make any difference unless followed by economic hardship. For another time since the long distant 1930s a fallen Wall Street is being saved hopefully by a heavy dose of Keynesian financial injections. 'We are all Keynesians now' is a phrase which was uttered two weeks ago by The Economist. Economics, which is fundamentally a combination of philosophy, psychology and mathematics, has an answer to the present troubles and it is based on the teaching of John Maynard Keynes, and the practical ability of Roosevelt, the American president, who won the last war for all of us.
Keynes had explained how a sudden drop in investment could lead to a long-lived slump, because prices, wages and interest rates would not adjust soon enough to make possible further investment. The solution was for governments to stimulate the investment it needed to return the economy to its full productive power. The trouble is that Keynes was referring to the terrible 1930s' depression, but not to any type of downturn. So investors should not be dismayed for there seems to be no possibility that the economic traumas of the Great Depression are going to be repeated. It is to be noted that Sovereign Wealth Funds (SWF) are proving to be daring contrarian investors pouring money into the like of Barclays and UBS.
Since the UBS results of last Tuesday, there has been responsible talk of its sell-off. Its long awaited restructuring through the splitting of its wealth management and investment bank section is going to be implemented. An angry letter appeared in the FT on August 11, signed by Harry Shatt, which lambasted the phrase 'mispricing of risk' pointed out frequently as a major cause of the present bank turmoil. Shatt said this should be labelled as 'willful fraud'. The Economist did not speak of 'fraud', but of something worse - Central Bank malfeasance. It gave prominence to the recent stand of Nouriel Roubini a New York University economist, on the matter.
An equally great danger is the apparent media statistical misinformation and even outright confusion in reporting this crisis.
The conclusion is that UBS is helping to do two things. It is giving deservedly massive future profits to SWF and also paradoxically strengthening the credentials of state capitalism which socialism is finally the heir.
Mr Azzopardi Vella has promoted the Malta Development Fund and advised S&P.
johnazzopardivella@hotmail.com