UBS and the Subprime Mortgage Crisis

UBS and the Subprime Mortgage Crisis

Appreciate the importance of an effective risk management system in the financial institutions.

The case examines the impact of the subprime mortgage crisis in the US on the Switzerland-based banking major, UBS AG. UBS’s exposure to the subprime mortgage market came to the fore in mid-2007 when it announced the closure of its hedge fund, Dillon Read Capital Management. By the end of 2008, UBS’s exposure to the subprime mortgage market was valued at Swiss Francs (CHF) 45 billion. In the financial year 2008, UBS reported a net loss of CHF 21.3 billion, the biggest ever annual loss reported by a Swiss company. The case includes a detailed note on the subprime mortgage crisis in the US and how UBS incurred significant losses due to its investments in asset backed securities that included commercial and residential mortgages. It also examines how UBS was bailed out of the crisis by the Swiss government and the Swiss Central Bank.

Issues:

» Understand the reasons that led to the subprime mortgage crisis in the US and its impact on the financial institutions.

» Appreciate the importance of an effective risk management system in the financial institutions.

» Study the drawbacks of high leverage in the investment banking business.

» Understand how UBS got exposed to subprime mortgage assets.

» Examine the bail-out plan for UBS.

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