UBS AG (UBS)

Switzerland-based UBS AG (UBS), formed through the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation, is one of the largest banks in the world with CHF2.3 trillion in assets (US$2.0 trillion) and a presence in 50 countries at December 31, 2007. The company organizes its operations into three main business segments: Global Wealth Management & Business Banking (93% of 2007 net revenue), Global Asset Management (9%), and Investment Bank (a loss of 2%). In Global Wealth Management and Business Banking, UBS provides retail and commercial banking services to clients abroad and in Switzerland, where it holds about one-quarter of the lending market and is the world's largest private bank with CHF2.3 trillion in client assets. The Investment Bank segment extends brokerage, research, and various other investment banking services to corporate, institutional, and government clients, and is gaining more recognition worldwide, ranking No. 1 in both global secondary equities and in foreign exchange. The Global Asset Management division offers a variety of investment products and services worldwide and has CHF891 billion of client assets.

The majority of 2007 net revenues are generated in Switzerland (59%), followed by Asia/Pacific (20%), the Americas (18%), and Europe/Middle East/Africa (3%). UBS management focuses on four key performance targets: (1) generating a return on equity of at least 20% (15-20% in years prior to 2006) (2) diluted earnings per share growth (previously basic earnings per share growth) (3) the cost/income ratio and (4) net new money inflows into all financial businesses (previously applied only to the wealth management units). UBS enjoys long-term ratings of Aa2 from Moody's (downgraded from Aa1 in July 2008), A+ from Fitch (reduced to AA- in October 2008 and from AA to AA- in April 2008), and AA- from Standard and Poor's (reduced from AA in April 2008).

On October 16, 2008, UBS announced that it will set up a fund consisting of US$60 billion in illiquid assets (such as those related to US real estate, US auction rate securities, US reference-linked notes, and other non-US securities) to be owned by the Swiss National Bank (SNB). The SNB will finance the fund with a loan of up to US$54 billion during fourth quarter 2008 or first quarter 2009, secured on the assets of the fund valued as of September 30, 2008. The loan will be non-recourse to UBS, assuming no change of control of UBS and will be priced at LIBOR plus 250 basis points. It will mature in eight years, but the maturity may be extended to 10 or 12 years. UBS will act as the investment manager of the fund, overseen by a board controlled by the SNB.

This transaction will be funded with US$6 billion of equity provided by UBS and to be sold to the SNB for US$1, causing a US$6 billion loss in 2008's fourth quarter. As part of this transaction, UBS has been granted the option to buy back the equity of the entity, once the loan is fully repaid, by paying the SNB US$1 billion plus 50% of the amount by which the equity value at the time of exercise exceeds that amount. Any remaining equity up to US$1 billion will go to the SNB and UBS will participate in 50% of the equity value exceeding US$1 billion. The option will be carried on UBS's balance sheet at its fair value.

UBS will also raise CHF6 billion in capital from the issuance to the Swiss Confederation of mandatory convertible notes (MCNs to be counted as Tier 1 capital) that convert into equity 30 months later, at which time the Confederation will own 9.3% of UBS's share capital.

With these transactions, UBS caps its future potential losses from these assets, reduces its risk-weighted assets, materially de-risks and reduces its balance sheet, and is no longer subject to the funding risk of the assets transferred. In particular, US real estate-related net risk positions outside the fund will be reduced to nearly zero.

On April 1, 2008, UBS announced writedowns of approximately $19.5 billion in 2008's first quarter related to its US real estate and related structured credit positions, stating that it would post a loss of CHF12 billion in 2008's first quarter. This news was accompanied by the statement that UBS chairman Marcel Ospel, who had survived relatively unscathed despite all the problems at UBS, stepped down on April 23, 2008. Peter Kurer, formerly general counsel of UBS, succeeded Marcel Ospel as chairman.

In addition, for risk management purposes, UBS announced that it will form a new entity to hold substantial parts of the work-out portfolio (containing US residential real estate assets), which will initially be wholly owned and financed by UBS. UBS's intention is to reduce its exposure in a way that reduces the effect of distressed market conditions on the core businesses, while providing the greatest opportunity for shareholders to realize value over time.

Following this announcement, three major ratings agencies downgraded the long-term debt ratings of UBS. Moody's cut its long-term credit rating on UBS to Aa1 from Aaa, while Standard & Poor's and Fitch both reduced their ratings to AA- from AA. Moody's again reduced its long-term debt rating for UBS on July 4, 2008 when UBS pre-announced break-even earnings for 2008's second quarter.

To counter the effects of these writedowns on its capital position, UBS completed a capital increase of approximately CHF15.6 billion, which was fully underwritten by a syndicate of banks, led by JPMorgan, Morgan Stanley, BNP Paribas and Goldman Sachs. After the CHF15.6 billion capital increase in June, the Total capital ratio was 14.0% and the Tier 1 ratio was 10.6% at June 30, 2008.

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