Looking for Answers at UBS

Monday's column outlining the UBS (UBS - commentary - Cramer's Take) announcement regarding auction rate notes garnered quite a bit of feedback, so I did a little more hunting. I think the issues have been better clarified at this point, but with that clarity come a lot of new questions.

What's the Point?

On Monday, Bloomberg reported that UBS devalued ARS and APS securities held internally and in client accounts across the board by 5%. Apparently, this is not the case. UBS has devalued these notes by an average of 5%.

They have, in fact, tried to put a fresh and separate lesser value on EVERY note in both their own and their clients' portfolios, using what they consider "appropriate" criteria. Many of the municipal debt instruments have been devalued by 1% or 2%, while some student-loan obligations have been priced as low as 65 cents on the dollar. While this makes a little more intuitive sense, it unfortunately inspires more questions than it answers. For example:

1. How can UBS reprice securities unilaterally in a phantom market?
2. How can UBS make such a move without the tacit agreement of the other investment banks that also have these securities in their clients portfolios and their own?
3. How can they claim to be protecting client interest and looking for a par solution for client holdings when they've reported to clients their holdings aren't worth par?

Sources at UBS claim that upper management felt they needed to take a write-down on the securities held in the bank's portfolio for their own internal balance-sheet reportage for the ending quarter, and felt it was disingenuous to represent client holdings in a dissimilar fashion. While we might consider this a laudable idea, without the pre-approval of the rest of the banking community, UBS is just making their clients a lot angrier.

What's the point? If UBS was looking to create a secondary auction market to allow some screaming customer to bail on bonds at a cut rate, they'd need a process and help, which they don't seem to have. I'm sure that UBS honchos are being flooded with calls from hedge-fund and private money managers, eager to buy out holdings that a frustrated client might want to sell -- at 65 cents on the dollar -- a pricing that UBS itself has applied as "fair value." So far, the company has not given clients an option like this, although it's hard to imagine how they can now prevent it.

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At the time of publication, Dicker had no positions in the stocks mentioned, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.