It turns out that it’s relatively easy to survive a subprime crisis, if you’re
a conservative Swiss bank. The problems at Citigroup and Fannie Mae and Freddie
Mac are basically that their losses are eating into their capital, leaving them
at or below their capital targets, and meaning that they have very little room
for maneuver. Contrast that with the latest news from UBS, which announced
a recapitalization today:
Together with the capital increase, Tier 1 capital would be raised by a total
of 19.4 billion francs, boosting its Tier 1 capital ratio to 12 percent.
No, that’s not a misprint. While Fannie and Freddie have difficulty maintaining
their Tier 1 capital ratio at around 4%, and Citigroup is trying desperately
to stay at 7.5% while still paying a dividend, UBS is now all the way up at
12%. And do shareholders dislike this inefficient use of their capital? Not
at all: UBS stock is up on the news, and the bank is now trading on a price-to-book
ratio of 2.26, compared to Citigroup’s 1.35. To put it another way, if Citi
was trading on the same price-to-book ratio as UBS, it would be at $58 a share
right now, an all-time high. Which is something that Vikram Pandit, or whoever
becomes the next Citi CEO, might want to stop to consider.