Dillon Read Keeps Bleeding UBS

Aug 13 2007 | 8:44am ET

The proliferation of sub-prime and stock market woes in recent days may have dimmed memories of May’s miseries, but some are set to be thrown into sharp relief tomorrow when UBS announces it second-quarter results.

Dresdner Kleinwort analysts predict that legacy positions from the Swiss bank’s recently-shuttered hedge fund unit, Dillon Read Capital Management, could cut its fixed-income revenue by a quarter, on top of the US$150 million in losses that led to the fund’s closure.

According to Dresdner, UBS was left holding some 20 billion Swiss francs (US$16.7 billion) worth of illiquid Dillon Read positions.

“Assuming leverage of at least five times (conservative in light of previous returns, we believe), UBS held at least 20 billion Swiss francs of related assets,” the report said. “This may have been partly hedged or sold since but we believe the majority of the positions exist, owing to unfavorable market liquidity.”

Further losses in Dillon Read positions are not the only problem for UBS: It will cost the bank about 300 million Swiss francs (US$250.4 million) in restructuring costs related to closing the hedge fund.


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