I'm a contrarian by nature. Hand me silver, and all I see is the lining to a cloud. As far as I'm concerned, there is no glass so overbrimming that evaporative losses won't eventually make it half empty. When things look bleak, I remind myself that it is always darkest just before it gets really dark. But although I discount good news, I also take news that the world is coming to an end with a grain of salt.
A case in point came in today. Swiss banking giant UBS announced that it was writing off $19 billion in assets related to subprime mortgages in the US. This is on top of the $18 billion that they wrote off less than six months ago. UBS is seeking to raise $15 billion in fresh capital to shore up their balance sheet, and oh yes, they've pitched their chairman out the airlock for orchestrating this debacle. "Can you breathe vacuum, Herr Chairman?"
The headline for this story is obvious: "UBS Writes Off $19 Billion." I think the critical item comes a little deeper than the lead paragraph, however. The asset write off came as part of UBS's announcement of first quarter earnings. For the first quarter of 2008, UBS lost $12 billion, including the write off. A little simple math tells us that without the subprime mortgage problems, the bank would have earned $7 billion in the last three months.
That is the real story here. The banks taking the hits that have shaken the global financial system are large diverse organizations with multiple lines of business that are still very profitable. In time, they will work their way out of the mess that they created, and will begin providing a return for their investors again.
We're not out of the woods yet. Housing prices are going to fall further, and we are going to see further write downs on securities backed by unpaid mortgages. We haven't seen the full effect of the collapse of the housing bubble, as it plays out on the wider economy. There will be a lot of pain, and a lot of bad headlines still to come.
But the sky isn't really falling. At least, not today.
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