UBS (UBS) this week unveiled a plan that may just be the blueprint for other banks with troubled loans on their balance sheets.
UBS essentially has placed securities linked to US mortgages into a separate subsidiary. The eventual goal will be either to spin off the subsidiary or, in the short term, sell chunks of it to investors.
Doing it this way would essentially remove the loans from the balance sheet and restore critical ratios. Lehman Brothers (LEH) CFO Erin Callahan essentially confirmed the plan when she said on CNBC “we want to continue to move illiquid securities of the balance sheet”.
This is somewhat similar to the “Super SIV” fund that was bantered about last summer but never gained traction as the banks bickered about who would contribute and control what. Now that much of the credit crunch has washed through the system, buyers like Wilbur Ross have begun to emerge as buyers of mortgage assets.
The fact that some buyers have emerged is good news as it says to us the logjam in this asset base shows some signs of loosening.
Look for Citigroup (C), Meryl Lynch (MER), Morgan Stanley (MS) and Wachovia (WB) to begin talking about a similar action. For shareholders, restoring the balance sheet in this manner is preferable to a large dilution on unfavorable term like the ones we have been seeing lately.
Disclosure (“none” means no position): Long C, WB, None
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