UBS AG (USA) (UBS)

To the people who recommended my last pitch: I ended my last pick and you thought I lost faith because there are rumours of a HSBC buyout. No way. This is the time to cash out and double down on it going south.





I will update my last pitch here.





There is even more evidence of weakness at UBS.





1) Why would HSBC want to buy a firm leaning over a cliff with their arms flailing?





There are tons of problems with this firm. Investment banks really have no assets other than their people and their deposits. There is a significant chance of a run on UBS and in that case HSBC can get the firm at half of the current price with a Bear Sterns like sweetheart deal from the ECB with less hassle and all the upside.





2) "We have hedges. They sit in front of my house."





In lawsuits between UBS and a hedge fund sold credit default swaps to insure a toxic CDO, we see that UBS knowingly chose seriously undercapitalised enterprises to offload their risk. If this is the case in even some of their positions, you can expect of much of UBS claims of "net exposure" are seriously under estimated.





http://www.nakedcapitalism.com/2008/06/ubs-cds-lawsuit-harbinger-of-things-to.html





3) Referenced Link Note program will be dismantled





A large part of previous profits were from a borrow short / invest long model. There are six structures that have all now exhausted their credit protection on the assets that they still hold. There is


over 9B still invested in this program. Just slowing the business


down will continue to incur losses.





http://www.ubs.com/1/e/investors/quarterly_reporting.html





Keep it simple and go to the Q1 slide presentation (Slide #29)





4) Bond insurer downgrade will force more writedowns





Still a lot of mortgage exposure on their books. For the details, just look what UBS is willing to tell us in their reports. Oh nelly, this is not good.





http://www.ubs.com/1/e/investors/agm.html





Click on "Shareholder Report on Writedowns" (PDF File).





Previous problems that are still not resolved....





5) UBS still holds $400B in repurchase agreements for funding





3/14/08 “Analysts also said they expected the ailing bank making further writedowns on a massive 400 billion franc portfolio of repurchase agreements as it rushes to cut its exposure to the capital markets in general and to risky assets in particular.”





The attempt to sell the bank is a desparate attempt to save remaining shareholder value. I don't think anyone wants all of those problems right now.





Previous problems that are still not resolved....





6) Efforts to sell assets for cash failed: Paine Webber brokerage arm to raise cash





Swiss bank UBS, another bank suffering from the credit crunch, recently shopped its PaineWebber brokerage unit in an effort to drum up cash but failed to find the right buyer. (BAC, Wells Fargo and Barclays all declined)





Bull Arguments





1) One of the highest class wealth management firms in the world





Nazi war criminals and African dictators all love Switzerland. That is the place where evil leaders go when they reach their "number". This generates tremendous fees for UBS and CS.





2) Able to raise cash





The recent $15B rights offering gave them cash to recover recent losses. But all of this is completely dilutive the share price and although bond holders cheer, the shareholders continue to suffer.





I will reiterate my target share price and modify previous prediction: UBS will survive, there probably will not be a run, but the chances are there. IMHO, UBS is one of the major reasons that the Fed set up the TAF for European banks too. The company will continue to go to the confessional on a lot of the repos, leveraged loans, and lost prime brokerage business.





Thus I still believe it will bottom at $12 / share by year end.