Vice-Chairman Alex Krauer said the magnitude of the Long-Term fiasco "came like lightening that struck the board" at UBS, but he moved to assure markets that "this is not a financial crisis, it is a crisis of confidence."
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Krauer, speaking from a tele-conference press briefing in Zurich, said an internal study didn't show any "gross negligence on the part of the persons involved."
Still, heads have rolled. Mathis Cabiallavetta stepped down as chairman, being replaced on an interim basis by vice-chairman Krauer. Resigning along with him are Flex Fisher, chief risk officer; Werner Bonaduer, co-chief operating officer of Warburg Dillon Read, and Andrew Siciliano, head of rates at Warburg Dillon Read.
Chief Executive Marcel Ospel said the bank's exposure to Long-Term had been spread through a number of accounts, meaning the bank didn't even know the full extent of its risk exposure. "[There was] a lack of an overall view which would have given us an idea of the risk," Ospel told reporters. "This is what we derived from our internal audit," he told journalists.
But credit risk specialists are appalled by the fact that mighty banks such as UBS had - and continue to have - such a poor handle on their credit risk exposure. "I find that abominable," said Mark Rodrigues, head of global risk management at American Management Systems' London branch.
Rodrigues also said that traders are still putting banks at substantial potential risk because the risks they assume in the market are often not captured on profit and loss statements. Nor are they really understood by the top managers who employ them. "The only accurate thing on a P&L statement is the date," he noted wryly.
Asked whether UBS plans to sell its Warburg Dillon Read investment bank unit, Ospel said: "No, we're not going to sell it now. I cannot make a statement on that now. We don't want to ... throw the baby out with the bath water." When asked if there were any other losses concealed, he said, "We assume there are no such commitments, and as I said, the interaction between the different [accounting] books will be improved."
Investors, however, re in no mood for promises. On Thursday, Merrill Lynch (MER) said that more than half of its $2.08 billion total exposure to hedge funds is to Long-Term Capital Management. Merrill said it holds $1.99 billion of collateral against that exposure. Bankers Trust, meanwhile, disclosed total exposure to hedge funds of $875 million under foreign exchange and derivatives contracts, with most of that collateralized.
A glance toward Germany made markets even more ill. There, banking shares fell to their lowest levels this year as the head of Germany's Federal Credit Supervisory Office, Wolfgang Artopoeus, warned that institutions would have to raise their risk provisions because of their international exposure, the Financial Times said.
Then there was the Bank of Italy - the Italian central bank - which said it had invested $250 million of its foreign exchange reserves in Long-Term Capital Management.
Bad news is raining down as hard as bank stocks are falling. And don't expect it to stop soon. Analysts say the market is going to rip a few more arms and legs off banks before the carnage is finished. "There's a complete lack of confidence in the banking sector," said Gary Jenkins, head of European credit research at Barclays Capital in London.
Written By Suzanne Miller, CBS MarketWatch London bureau chief