When banks profit from bad news

Swiss flag and UBS sign The Swiss bank is planning to shrink its investment banking division to reduce its risks

You might think that today's announcement from UBS that it will make a small profit in its third financial quarter, in spite of its $2.3bn (£1.5bn) loss from alleged rogue trading, would be good for confidence in UBS and other big international banks.

And it is not terrible news. Except for one thing: the biggest contributor to UBS's unexpected profit is what it is known as "credit gains on financial liabilities measured at fair value" to the tune of $1.6bn or £1.1bn.

Now these are the kinds of profits that banks should not really like to make - because they imply that conditions in financial markets have become more stressed and that the price of debt issued by banks has been falling.

I will translate. Under accounting rules, which many would see as surreal, banks enjoy a profit boost when the price of the bonds or debt issued by them falls - because the idea is that, in theory, the banks could buy back a liability of $100m (for example) at the new market price of $90m, thus yielding a fat $10m profit.

Except of course this a completely notional profit that can't normally be converted into a real profit - because in stressed market conditions, banks find it hard to borrow a bean on markets (a big hello to banks in Greece, Italy and France) and aren't exactly flush with cash with which to redeem their debts.

So when you see banks like UBS talking about having made "fair value" gains on financial liabilities - or, in the more normal jargon, "profits on own credit" - the best thing to say is "yikes". Because it actually means that investors' and creditors' confidence in banks has been falling.

Which brings me back to the paradox of today's investment banking, which I alluded to in my note of last night.

The really interesting thing about the next round of investment banking results will be what the likes of Goldman and Morgan Stanley say about their longer term prospects.

It's well known that their results for this year are going to be shockingly poor. But the really interesting question, now that they've been forced by regulators to hold much more capital and cash as a protection against shocks, is when and whether they'll ever again make the bumper profits of yore.

Or to put it another way, in the absence of dangerous leverage - or huge debts relative to their capital resources - can Goldman, Morgan Stanley, Barclays Capital and so on make a decent return without a massive overhaul in their business models (management-consultant speak for huge job cuts)?

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 371.

    ComradeOgilvy @370
    More @Editors: Guest Presenter
    Mainly between lines!

    So much to cover for New World, but starting point IS 'easy', MUST be easy, for ALL to grasp & ALL have confidence in?

    As from Churchill on GOOD religion (?), 'clever' questions on questionable Heaven best left - for the time being at least!

    Representation… I write trying to represent… you too?

    Why not our good MPs?

  • rate this

    Comment number 370.

    367.All for All

    perhaps implausible but let's work on it anyway.

    368.All for All

    By the people, but not all the people all the time. As WOTW would say: Anarchy is not Chaos.

    Co-operation is required in society. Is leadership? If so, is leadership the same as ruling?

    "Have to trust…?" - Trust and be trusted. Selectively of course.

  • rate this

    Comment number 369.

    United Dreamer @364
    "perfect sense"
    Virtue equal?

    fbl hyperbol @57 recognise "fascist coup", negligent "democracy"

    UD @106 recognise "coordination" need, even global

    UD @119 "realisation" w WOTW: "collectivised egalitarianism" @144

    AfA @176 'followed' UD @138 no offence intended, no response

    UD @199 near "collapse" - follow 'dictates' of conscience to 'represent'?

    400ch deliberate hazard?

  • rate this

    Comment number 368.

    ComradeOgilvey @362
    Have to trust…?

    Dominant personalities can THINK that 'democracy' is achieved in any forum, from kitchen to feudal court… In my experience of 'debate and decision' - family, small-group work, large meetings - 'the process' is very very imperfect

    I would LIKE, for myself and others, the safeguard of Income-Share Equality, closer to All for All

  • rate this

    Comment number 367.

    ComradeOgilvey @362
    Have to trust…?

    In genuine egalitarian democracy, UNDERSTOOD therefore maintained, there is effectively 'no ownership' (use for rent) and 'no rule' (rules trusted as if self-made, freely queried if need be)


Comments 5 of 371



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