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UBS AG (NYSE:UBS)

F2Q07 Earnings Call

October 30, 2007, 9:30 AM ET

Executives

Thomas R. Hill - Chief Communication Officer

Marcel Rohner - Group CEO

Marco Suter - Executive Vice Chairman and CFO

Analysts

David Williams - Fox-Pitt Kelton

Kian Abouhossein - JP Morgan

Derek De Vries - Merrill Lynch

Christopher Wheeler - Bear Stearns

Anke Reingen - Execution

Claudia Meier - Vontobel

Huw Van Steenis - Morgan Stanley

Kinner Lakhani - ABN AMRO

Mathew Clarke - Keefe, Bruyette & Woods

John Keyes - Lehman Brothers

Jeremy Sigee - Citigroup

Solveig Babinet - Morgan Stanley

Stefan Stalmann - Dresdner Kleinwort

Peter Thorne - Helvea

Presentation

Thomas R. Hill - Chief Communication Officer

Good morning and welcome to the presentation of our Third Quarter Results. You should be aware that there are forward-looking statements in this presentation and their actual results may differ materially. Additional information can be found in our third quarter report and elsewhere. Please take a moment to read the disclaimer on the next slide, and we look forward to answering your questions at the end. So, with that piece of house keeping out of the way, I'd like to handover to Marcel Rohner, who is the Chief Executive Officer.

Marcel Rohner - Group Chief Executive Officer

Thank you very much Tom. We have closed this quarter with a loss for the group before tax and minorities of 726 million francs. This is unsatisfactory and the development in UBS in the future will reflect the lessons learnt from this quarter. However, it is within the range of 600 million francs to 800 million francs, which we've indicated in our announcement on the 1st of October. And to put this into perspective our net attributable profits to shareholders for the 9 months of the year are 8.1 billion Swiss francs compared with 8.9 billion in the same period last year.

And our balance sheet with a tier I ratio of 10.6% remains one of the strongest in the industry. The overall loss, as I announced at the beginning of the month reflects losses in the investment bank in particular from write-downs of positions and securities related to the U.S. sub-prime residential mortgage market. This resulted in negative revenues of 4.2 billion francs in fixed income currencies and commodities which is the new name for the division following a reorganization under the leadership of Andre Esteves. Our other businesses are performing well. Global wealth management and business banking produced another set of record profits with another excellent quarter of asset gathering. Global asset management produced a solid set of profits despite a difficult quarter for markets.

Within the investment bank, IBD produced a record level of revenues for the third quarter with stable or increasing market share. And equities produced revenues in line with the year ago despite losses in our statistical arbitrage proprietary trading. In October, I announced senior management changes in particular change in leadership in the risk and finance functions, as well as my interim leadership of the investment bank. The detail, we have given you on the 1st of October was quite accurate, since we have not closed our books at that point. And there were trading activities plus some hedging transactions ongoing in the days immediately preceding our announcement.

Now with all the data in hand, we can confirm our exposures in a little bit more detail and they are also a little bit lower.

The residential mortgage-backed securities market was actively reduced mainly in MCC in asset-backed commercial page, so it stands now at $16.8 billion. The CDO warehouse was reduced by securitization transaction at the end of the quarter just shortly before the 1st of October plus some additional write-downs in the post closing period due to a further price testing and verification.

The super-senior position which I will discuss in more detail shortly, that's the third one, is at 20.2 billion francs. We have disclosed the notional values of our super-senior position for the first time. We were very reluctant to do so simply because the notional amount can be very misleading. The health warning, we have to put on these number is that it compares to some extent, apples-with-oranges. The total includes quite a wide range of different securities, with different subordination levels, maturities, collaterals, and also substantial differences in the rights... of the rights in the event of a default.

So I therefore tried to give you bit more details, so we can better understand and interpret these numbers. Of the 20.2 billion francs, 3.2 billion francs are actually high-grade ABS super-senior positions. A further 2.7 billion francs has a substantial first loss protection of 12%. About 13.2 billion francs are mezzanine ABS CDOs. Almost all of our net losses, of 1.65 billion go against the mezzanine ABS CDO. But even within that bucket due to the range of vintages, subordination levels, and collateral quality, the valuations are effectively somewhere between 70% and 100%.

I will give more color on the impact of the recent events on this positions and the outlook at the end of the presentation. And with that I would like to hand over to Marco.

Marco Suter - Executive Vice Chairman and Chief Financial Officer

Thank you, Marcel. Good morning. This quarter's loss is unacceptable. It is very disappointing that loss is coming from a few trading books which were marginal revenue contributors in the first place have clouded the very strong performance of our call businesses, our client-centric business in Wealth Management, in Global Asset Management and in the investment bank. This quarter has taught us a few lessons. It was timely wakeup call and I can assure you it has heightened our sense of urgency and we will tighten up some of call management disciplines. We need to re-focus our mission and we need to sharpen the way we execute this mission.

Our investment bank will need to redirect resources to client-centric businesses and it will need to rigorously deemphasize balance sheet capital and risk usage for some of our prop trading desks. In particular for highly unattractive carrier [ph] trades.

I am not suggestion that we will exit prop trading businesses, these are important and they are critical to support our client-centric businesses both in the investment bank and equally in our wealth management business. But we need to sharpen and tighten up risk management, balance sheet and capital usage.

This quarter's wakeup call and the new management team will allow us to press ahead with well overdue initiatives aimed at improving the way we manage cost and increase efficiency beyond simply to cost to income dimension. And we will do so in all our businesses even those that have been strong performers during this quarter.

It would be a shame if we were not able to repay operating leverage from our dominant mark position and scale in many of our call businesses and from our integrated model. I will now take you through some of our key profit and loss drivers and some of our key resource drivers such as personnel, capital, balance sheet and risk.

I have already said during this quarter, trading losses from a few trading desks in FICC have overshadowed our very strong client-centric fee commission and interest income. The income from these non-trading businesses to that over 10 billion Swiss francs, our second best quarter ever.

This figure includes our fee and commission income in Wealth Management, Global Asset Management and in our investment bank. Our strong interest margin income from Wealth Management and Business Banking and on a much smaller scale our net income from treasury and other activities.

Our fee and commission income was the main contributor with 7.9 billion Swiss francs this quarter close to our all-time high. Net income from our interest margin business was also very strong and hit a new all time high which 1.6 billion francs for the quarter. And this earned higher spreads on our strong and deposit base and partly because of continued growth in collateralized lending in our Wealth Management businesses.

Total operating expense for the financial business was just above 7 billion francs. Year-on-year, this was a reduction of 8% and compared to the second quarter they fell 27% mainly due to lower bonus accruals. The sharp reduction in personnel expense could suggest that they have over-aggressively reduced our bonus ambitions at the risk of destabilizing our workforce. This is not the case. In response to the weak trading results, we obviously had to reduce the bonus ambitions and hence the bonus accruals but not in the order of magnitude that these figures might suggest, and certainly not to an extent, where we would be at risk of destabilizing our very successful businesses.

But what we have decided to do in the investment bank is to pay an increased proportion of bonuses in shares instead of cash, the share component will be amortized in future periods and therefore has not hit our P&L during this quarter.

We believe this is the right thing to do in the current circumstances, as it will further align our key employees with our results and our share price development. You will understand that cost control is an exercise of long-term discipline and not a one quarter fix. But this quarter has helped us to reemphasize cost management initiatives that had already been underway and to start the few new additional initiatives.

Personnel expense is our key cost driver, but we equally are determined towards the focus on non-personnel expense, they have already fallen by 242 million francs during this latest quarter and this is an area we will continue to focus on going forward.

The number of people working in our financial businesses has risen by 3% over the quarter. The head count close in our wealth management businesses is very much desired and is evident while continued growth, commitment and investment in these businesses. Overall we have added 418 new financial advisors in our Wealth Management unit and we are particularly pleased that we've been able to stop the outflow of financial advisors in our U.S. business and that our growth momentum in Asia Pacific and in our European Wealth Management unit is continuing. The headcount growth in business banking, Switzerland for most part reflects, the annual hiring of trainees and apprentices.

In global asset management, the headcount reduction related to DOCM was more than offset by the first time inclusion of UBS Hana [ph] asset management, and by continued growth in our existing businesses.

The growth in the IB was of seasonal nature, as it mainly represents the hiring of graduates and trainees. The growth in the corporate centre was mainly driven by increased staff levels in our India service centre as-well-as in the IT infrastructure. The number of people employed in Asia rose 10% on the quarter and 41% compared to September 2006, as we continue our expansion in this fast growing and important market.

We do not expect overall headcount course at this rate in the coming quarters. But we'll continue to invest in our core markets and businesses. I have already said that we will sharpen our cost management. It is encouraging to see that this message has already shown first results. Compared to the second quarter we saw declines in almost every category of general and administrative expense. The group cost to income ratio disclosed has been distorted by the trading losses in the Investment Bank. What is very pleasing however, is that the cost to income ratio in both our wealth management units has improved and that we have demonstrated that these businesses have operating leverage.

With all the initiatives underway, I'm confident that we'll see further improvements, maybe not from quarter-to-quarter but certainly in the medium term. The cost to income ratio in business banking and investment management has experienced a slight deterioration. In both instances, this was due to slightly lower levels of revenues compared to the second quarter. Tom Hill, will give you more details on this.

Our return on equity and diluted earnings per share fell significantly in the quarter. In the case of the ROE ratio to a level not seen since 2003, our fully diluted earnings per share from continuing operations for the quarter were obviously negative. Year-to-date however, this figure was still strong and with 3.87 francs per share, it is only down by approximately 4% compared to the 4.04 francs per share for the same period last year. Our tier I one ratio has fallen from 12.3% to 10.6% during the quarter. But it remains at a very high level. Let me briefly explain what caused this development. On the one hand, we have experienced a 3% increase in our risk rated assets despite a slight reduction in our overall balance sheet footing. The following factors have contributed to this increase.

First, the volatile credit and foreign exchange markets have led to higher positive replacement values from our OTC derivative activities. Second, some traded loans awaiting securitizations had to be treated as banking book assets for capital adequacy purposes. Finally, the number of back testing exceptions in our VAR model has led to an increase in the conversion factor and ultimately to increased risk rated assets from our trading exposures.

In addition to the higher risk rated asset number, we've also experienced a reduction in our tier I capital. The numerator into tier 1 ratio calculation, the Group loss, quarterly dividend accruals, foreign exchange effect, and our share buybacks were responsible for this development. Despite this reduction of our tier I ratio to 10.6% this continues to be a very strong level and need to presents one of the highest ratios in our industry. Marcel has highlighted from the first day of his appointment, his determination of managing our balance sheet more efficiently. Let me assure you that I passionately share his view and ambition in this area. I've already said that our total assets have shown a slight reduction from the previous quarter.

Overall the reduction was marginal and mainly attributable to a weakening of the U.S. dollar against the franc. The main use of our balance sheet is our investment bank and within the investment bank it is our FICC business. We've already said that one of our key priorities is to introduce more balance sheet discipline. Starting next week, we will charge to business a higher rate for accessing our unsecured funding capacity and we'll implement a new haircut funding model which in essence will penalize illiquid assets, as these will increasingly require term funding. These measures will undoubtedly lead to a reduction in the absolute size of our balance sheet and equally to structural changes on how we fund our assets going forward.

Our credit loss performance was again very strong. We have not seen the continuation of the recoveries that you have now experienced for 14 consecutive quarters, but this was to be expected. I would also like to highlight that the write-downs which you have experienced from our leverage lending underwriting exposures are not classified as credit losses but they are treated as trading losses. Investment bank valued risk on a 10-day 99% confidence level ended the quarter at 676 million francs up from 454 million francs at June end mainly driven by increased market volatility. The average 10-day VaR, by contrast, was lower at 447 million francs compared with 532 million francs in the second quarter.

Average VaR for UBS has, however, decreased to 444 million francs from 518 million francs in the previous quarter. Once again corporate center exposures have tended to provide some offset to investment bank positions. The change in the market conditions, which began in August is only partly reflected in the third quarter VaR. The full impact will not be felt until the fourth quarter. So the VaR number at the end of the quarter is probably a better guide to the likely average level for the fourth quarter.

Back-testing compares one-day VaR calculate the positions at the close of each business date with the revenues arising on those positions on the following business day excluding in today trading revenues, fees, and the commissions.

VaR, as we know is a good aggregate risk measure for normal market conditions. This quarter was not normal and this is illustrated by the number of back-testing exceptions that you see on this slide. In summary, the results are within the range that we have indicated on October 1st. This quarter has been a wakeup call and will allow us to press ahead with changes in the way we manage our balance sheet, risk, and other resources. Having said this, the profits from most of our business areas will remain very strong. And yet again, we delivered a very strong net new money performance. With that I will hand over to Tom.

Thomas R. Hill - Chief Communication Officer

Thank you. As Marcel and Marco have said, most of our businesses are performing very well. Let me now give you a more detailed explanation of how each of them has done in the quarter. Global Wealth Management and business banking achieved another new record level of profits of 2.4 billion francs in the third quarter. Net new money of 41.1 billion francs was also very strong and the cost income ratio fell to 62.7%. Wealth management international in Switzerland achieved a record in net new money levels, again demonstrating the strength of its market position, and the platform. The level of invested assets, managed by the international plants area exceeded the 1 trillion francs level for the first time, and we also broke 200 billion francs level in Asia Pacific.

Profits in the quarter rose 32% year-on-year to a new record of 1.6 billion francs. Within this, the European domestic business more than doubled profits compared to the second quarter. Net new money was a new record of 7 billion francs and the number of client advisors rose by 44 over the quarter and now it stands at over 1000.

Wealth Management U.S. saw good net new money flows of 5.1 billion francs although the weaker dollar meant that invested assets measured in francs fell by 3% to 870 billion francs for the quarter. Wealth Management U.S. profits were up significantly to 181 million francs with further gains in fees and other recurring income as a decline in total expenses over the quarter. Business Banking, Switzerland, was again strong although profits in the third quarter fell slightly from the record levels achieved in the second quarter. These were of course boosted by one off gains from the disposal of equity participations in particular. The economic value of the business banking is of course higher than this profit ever would suggest, because of the continued shift of client assets to Wealth Management International in Switzerland.

The amount shifted in the third quarter was another record 2.8 billion francs. Profits from Global Asset Management were again strong at 369 million francs. This is a sharp increase from the second quarter figure, which included the restructuring costs at the RCM. Excluding those costs second quarter profits would have been 450 million franks. And the decline in profit levels in the third quarter from that figure mainly reflects lower performance fees in ANQ and in the Brazilian Asset Management business in the context of freak market conditions during the quarter. Global Asset Management has a broad range of investment capabilities and this diversified model proves its worth in the third quarter.

Net money outflows were 2.8 billion francs, but this consisted of money market inflows which are volatile at 6.1 billion francs and 8.9 billion francs outflow in other categories. The main source of these outflows was from equities mandates where investment performance has been weak for sometime. But this was offset by high margin inflows and other capabilities. As we mentioned in August, we have changed the leadership of the investment team in equities and we hope that overtime, this will lead to improved investment performance followed by better business results.

The good news in the investment bank in the strength our investment banking division which produced record revenues for the third quarter showing an increase of 38% year-on-year and increased its share of the fee pool to 5.8 % with particular strength in equity underwriting on the rising where UBS is the market leader.

Equity revenues were at about the same level as third quarter 2006 but fell sharply compared to the second quarter. This included a reversal in our proprietary trading results, in particular, losses in statistical arbitrage.

Investment bank costs fell 34% year-on-year mainly because of marginal personnel expenses. And of course the cost-income ratio was not meaningful due to negative revenues this quarter.

With the losses in fixed income currencies and commodities, the overall loss for the investment bank was 3.7 billion francs in the quarter. Corporate sensor recorded a pretax loss of 3... 31 million francs. This loss is below the normal quarterly run-rate mainly because of higher treasury income and this effect may reverse in the fourth quarter.

Industrial holdings produced an attributable profit of 256 million francs, of this 167 million francs is from continuing operations and 89 million francs is from discontinued operations.

In summary, our asset gathering businesses continue to produce improving levels of profits and good levels of net new money. We are addressing the under performance of part of the equity capability in global asset management.

Most parts of the investment bank continue to grow and as we have told you, we have taken steps to resolve the weakness that led to the losses in parts of fixed income currencies and commodities. With that I will hand back to Marcel Rohner.

Marcel Rohner - Group Chief Executive Officer

Like we first tried to give you an idea about the inherent risks in our portfolio and the exposure with respect to the U.S. sub-prime market. The recent market downturn was largely triggered by substantial number of downgrading in the residential mortgage back security space, a series of difficulties in some asset backed commercial paper conduits and SIVs.

We have seen housing stats and building permits stayed at an all time low and we obviously have also seen further deterioration of remittance data. Especially the remittance data is only available since late last Thursday. So many of the risks statements have to be taken with caution as there is still significant model uncertainty around all the valuations.

The primary impact of these downgrades goes against the collateralized debt obligations. If a CDO itself gets into an event of default, anything below the sub... super senior tranche will be negatively affected. And despite the fact that the majority of our remaining warehouse retained CDO positions are AAA, this will imply that we have to take further write-downs in this part of our exposures.

The mezzanine ABS CDOs also hold a small percentage of CDOs apart from there RMBS appreciations; usually that's between 5% and 10%. Those will also be negatively affected by the same affect as I have just explained before which will require write-downs in the CDO positions. And thirdly the week remittance data itself will affect primarily the CDO, the super senior, and it will require further write-downs in that part of the book. If it comes to a default however it actually strengthens the position of a super senior tranche holder and the cash... as the cash flows are diverted away from the lower levels of subordination to the most senior part of the liability structure and this in turn compensates for some of the write-downs.

Last but not the least on the RMS portfolio itself, effectively made money through the very turbulent 10 days, 14 days in October. So these are the effects these recent events will have on these various markets of our position. And given all we know today which is the very preliminary analysis of the impact of the down grades and the very latest remittance data as of last Thursday. On all our positions, we think it is unlikely that investment bank will contribute positively to the group. At the same time, however, we believe that the group as a whole should deliver positive result in the fourth quarter.

Summarize the overall results. Clearly overall profits, i.e., losses, are obviously unsatisfactory. But beneath the headline number there are good results for most of our businesses outweighed by substantial losses in a small number of business lines with the new management team we're implementing changes to correct the areas that contributed to the losses.

There are immediate signs more visibly in management counts and in our day-to-day decision making and in the results so far obviously which show of an improvement in our resource control. We are doing this from a position of strength in many of our businesses. Thanks to strong positions and many client product in geographical segments within which we are active, not only in wealth management and global asset management but also in the investment bank. So, this leads to the end of our results presentation. As we've said, we believe overall, we'll return to profitability in the fourth quarter 2007. We are well positioned in an industry which is supposed to grow in the medium term. We've a very strong reputation with private and institutional investors, and with companies and governments. We are well established in all the world's major markets.

By reinforcing our traditional disciplines we'll build an even stronger client driven growth business. We'll now take telephone questions from analysts and investors before we'll move to the Q&A with the media.

Question And Answer

Operator

The first question is from Mr. David Williams, Fox-Pitt Kelton. Please go ahead sir.

David Williams - Fox-Pitt Kelton

Hello, good morning.

Marcel Rohner - Group Chief Executive Officer

Good morning.

David Williams - Fox-Pitt Kelton

Question on your tier I ratio please and then also on the fair businesses. Obviously with the decline in the tier ratio, could you give us some indication of your thoughts on the buyback going forward and also given the thought that SMP have taken the credit rating dates AA, how important is it for you to recover a senior credit rating to AA. And the second part on the fixed income business. Could you just give us an indication of what part of the credit markets are currently functioning for you and if you are earning revenues in the credit markets outside of obviously the RMBS area and sort of in that sense give us some indication or perhaps sought of underlying credit run rate excluding the difficult RMBS markets?

Marcel Rohner - Group Chief Executive Officer

Let me start with fixed income and then we'll hand over to our CFO with respect to the tier I ratio share buyback programs. The fixed income business is what I can say is also from looking at the first few weeks of the first quarter or actually contributing in all business lines positively. We basically see the fixed income markets functioning pretty much anywhere with the exception of the residential mortgage back securities market where we clearly see very, very low activity levels, very little issuance and refinancing activities at all. But, generally I would say this very specific pocket we see a very much normalized activity and performance pretty much across the board. Then on tier I, Marco?

David Williams - Fox-Pitt Kelton

Thank you.

Marco Suter - Executive Vice Chairman and Chief Financial Officer

On the tier I ratio I went through the reasons that caused decline in first place and share repurchases that we had executed into third quarter will remain contributable to the reduction in our tier I capital. As we have always said we'll only do share repurchases if we feel this is the best use of our resource and this is probably not the time where we are going to do more share repurchases but we hope that we will soon be in a position again from strengths where we can resort to share repurchases. As far as rating levels, we are still rated AAA and have a high AA rating from S&P. High ratings are important to us, as they clearly are demonstrating to our investors and to our customers our solid financial position. This is not only reflected in our credit ratings, it is also reflected in the credit spread and UBS continues to fund itself in the market at very tight credit spreads compared to our competitors.

David Williams - Fox-Pitt Kelton

Thank you.

Operator

Our next question is from Mr. Kian Abouhossein, JP Morgan. Please go ahead sir.

Kian Abouhossein - JP Morgan

Yes, hi. I got two questions; first one relates to increasing share compensation. Looking at your annual report, you had shares awarded last year of 27 million roughly and you had granted options of 45 million francs, 46 million francs. I was wondering how should we look at earnings dilution next year due to higher granting of shares and options due to compensation. And the second point and the second question I have is related to your write-downs to your exposures. What I am not exactly clear of is how much is related to mark-to-market and how much is rated to market to default, i.e., could you go through with me on what is really mark-to-market, to indices and market prices and what of your part of your exposures is actually marked to default? Thank you.

Marcel Rohner - Group Chief Executive Officer

Okay, let me answer the first one. On options, we basically have our conditional... capital has approved what was a two years ago 2006 AGM which basically sizes the amount of options which we are entitled from our shareholders to be valid, so that there's nothing to change about that on the share based compensation. It is a one year initiative now that we basically increase to deferred part of our share based compensation in our investment bank. We think this is the right reaction with respect to the performance challenges we have and what it basically does is it defers this part of compensation as this share buybacks are amortized over the few... in the future years.

Now with respect to the write-downs, just to be clear for all the three buckets which we have is closed. There are only very little market prices that's available. We do not mark against the ABX index. This index is extremely illiquid in reference to only small number of vintages and tranches and they are not identical with what we hold in the position. You have your positions in the ABX index as sort of a hedge [ph] and obviously we have made some money on these hedges during the past few weeks.

On the other hand, how we value is basically by comparing similar products and the traded products and by applying modals. The super senior positions are basically marked based on a model which makes a few projection of expected cumulative losses based on the remittance data. And as this remittance data now gets worst that triggers a write-down. And then obviously the impact on... of defaults on the CDO that basically means that junior tranches of CDOs are substantially written down in some cases. It actually means that they loose even their interest rate-only value because the cash flows are diverted away. That's how we look at it and value the books.

Kian Abouhossein - JP Morgan

Okay. And just coming back to the... I mean if you are valuing it on similar products or I'm still not exactly sure how much of your book is actually related to default variations which would mean that we see continuous impact as defaults increase and how much is related to some kind of similar product marked to market valuation?

Marcel Rohner - Group Chief Executive Officer

You should assume that RMBS part, similar product valuation because there you have the infrequent trading and you should assume that the super senior is modeled I think what you call modeled to default but which I would call a bit different piece... a mark-to-model and the model has a remittance data feed which drives the outcome. And there as a result of course if this... if there is a yet another step change in expectation that would have a negative impact on the valuation as you rightly said.

Kian Abouhossein - JP Morgan

And if I may ask one more question on the super senior, we're talking I assume illiquid, only liquid credit in here?

Marcel Rohner - Group Chief Executive Officer

Well these positions are very, very liquid. There is essentially no market for this super senior position.

Kian Abouhossein - JP Morgan

Okay.

Marcel Rohner - Group Chief Executive Officer

And the way I mean there is no... is not the case that there is no activity possible at all. I mean there are a range of options which occasionally work in terms of related or sort of hedging activities, some loss protection at trades and other elements which we are continuously considering.

Kian Abouhossein - JP Morgan

Thank you.

Operator

The next question is from Mr. Derek De Vries, Merrill Lynch. Please go ahead, sir.

Derek De Vries - Merrill Lynch

Thank you. It's Derek from Merrill. Just following on Kian's question, there are a wide range of the forecast in terms of where with the expected default rates on the 2006 vintage of sub-prime go. And it seems to be somewhere between 10% and 16% or 10% and 18% something in that range. Can you tell us when you look at your super senior, you know what kind of default levels do your models tell you are going to be appropriate for the 2006 vintage and then maybe some other vintages as well? And the second question I would have, can you quantify or at least qualify the exposure you will have to the monoline insurers, i.e., the Ambacs and MBIAs of these world? Is that a significant exposure for you? And then the third question I have comes back to the fixed income business again. In the last couple of quarters you have given us a very helpful slide that showed the revenues by the business segments within fixed income, you have dropped that slide from your disclosure and I am trying to sort of reconcile, the reported fixed income revenue number, stripping out the marked downs you have taken on your sub-prime exposure, but I still don't know the markdowns you have taken on your LBO book, I am trying to kind of get what is a run rate excluding what we hope will not be a continual occurrence of mark downs and I get to a pretty low number. So if you could give us the previous disclosure on the sub segments, it would be very helpful.

Marcel Rohner - Group Chief Executive Officer

Well I think we can do that but we will do that to a Investor Relations, thereafter we have obviously two issues. We are also in the middle of repositioning our fixed income businesses. So some of the allocations of revenues of this various businesses might actually change as a result of that. With respect to the loss rates, they always, as you rightly say depend on entities and they arrange from vintages you mentioned, some of them are at 7%, some are at 9.5%, and others are at 13% loss protection plus/minus it depends on what it is. But that's about what we apply in there. And now with respect to LBOs, we've actually disclosed write-downs, we have gross write-downs of $400 million, that was 385 as we said at the 1st of October, there is a little adjustment in the post closing period which affects results and I think it is obviously difficult to say, but then in the end the run rate is, we'll have two effects, we'll clearly see a slowdown on the RMBS market that will take a long, long time until this market will come back to the previous levels. Then we have also an impact although albeit at a much smaller than people probably expect because this business is going to get profitable by reducing our balance sheet. So I think very broadly at that moment of time for next year, I think we could expect fixed a income run rate to begin with a do away which is roughly at the level of the beginning of 2006.

Derek De Vries - Merrill Lynch

And that include... when you say the run rate will be 2006, obviously in 2006 you didn't own Pactual until December but what you are basically saying is look if you take 2006 revenues and fixed income, it's probably not a silly starting point for your '08 estimates, is that right or you are thinking like-to-like business line for business line?

Marcel Rohner - Group Chief Executive Officer

No, it's a rough overall estimate. And it's... that's probably a bit lower... a bit smaller than the full 2006 which as I said beginning of '06.

Derek De Vries - Merrill Lynch

No, that's very helpful. Thank you.

Marcel Rohner - Group Chief Executive Officer

You are welcome.

Derek De Vries - Merrill Lynch

And on the monoline insurers?

Marcel Rohner - Group Chief Executive Officer

Monoline insurers, we obviously do have also traits where we do have protection from monoline insures. We have obviously a tight control over this exposure. We also manage this exposure but we would not name by name or in anyway be in a position to say that. Marco?

Marco Suter - Executive Vice Chairman and Chief Financial Officer

We have bought protection on some of our exposures from monolines. It's not the big order of magnitude and the protection we have bought from monolines is typically on exposures where the underlying exposure is already better quality in the first place. So we do not consider our exposure to monoline to be of any significance.

Derek De Vries - Merrill Lynch

Thanks, very helpful.

Operator

The next question is from Mr. Christopher Wheeler, Bear Stearns. Please go ahead sir.

Christopher Wheeler - Bear Stearns

Yes, good morning gentlemen. For this question is on the risk-rated assets in the investment bank. I see they have gone up by about 7% to 209 billion. Could you give us some indication as to how much of that is a results of holding paper on your books that you would normally have not held on your books as a results of the problems, just some rough indication of that. How much if any is down to an organic growth in the business. And perhaps secondly Marcel, I think 3 weeks ago, 4 weeks ago you talked about reducing risk-weighted assets by 25% or so roughly in the next 12 months in the investment bank. Again, can you perhaps talk in relation to that 209 billion figure, about how much of that you would see to be merely the wind down of some these problematic positions and how much would actually be withdrawal like some of the capitals in the business as a whole. And I think related to that if I just follow on, we talked a bit earlier that some of the new disciplines you are putting into the business in terms of cost to funding. Could you just go over again, what are the key things you were trying to do in the next 12 months in terms of tightening up. Funding costs, you obviously push yourself towards high margin businesses, but also just talk about what you were thinking about in terms of asset... sorry, capital allocation. So I think you have also been talking about that as a key factor in bringing much more discipline into all the businesses in the group. Thank you.

Marcel Rohner - Group Chief Executive Officer

Well, the last one, I will also pass on to Marco, but let me just correct one thing, I said our balance sheet will be reduced by 25% to 30% and not our risk-weighted assets. Historically the positions we are talking about have actually attracted nearly no risk weighted asset charges despite the big damage they do now to the profitability. This has changed a little bit because as the whole market risk capital frame works, once this positions do become volatile and you replace the measurement, then the VaR charges go up and then they attract more risk weighted assets. And clearly overtime we want to reduce all those positions. So this part should go again away due to the illiquidity, this is not that straightforward.

The increase you have seen is actually substantially driven, it goes across the businesses, so its largely organic growth but one substantial part is also on replacement values of protection which we have bought in the structure credit markets which leads then to an increase in risk weighted assets because these position actually become valuable because they give us some protection.

So that's on risk weighted assets and the balance sheet reduction... cost of funding, and just one word before I pass on to Marco. Fundamentally we say that we want to fund the activities where the competition is funding them maybe a big better two, three basis points. But that's fundamentally the approach we are going to take in order for us not creating a disincentive for activities to do as we have said before low margin, high volume, direct rates to choose a lot of balance sheet resources, but ultimately do not really contribute to sustainable growth of earnings. Marco? On capital and funding.

Marco Suter - Executive Vice Chairman and Chief Financial Officer

Maybe to come quickly back on risk weighted assets as well. One of the question was how much was organic and how much was not organic. I think, we have very little organic risk weighted asset growth in the investment bank. The replacement value growth is very hard to differentiate what is organic and what is just market moves. The stale assets have contributed very little. One contribute, the worst affected, we had the back-testing exceptions and the back-testing exceptions, as I have explained during my presentation has led to a higher multiplier. Basically the regulator applies a multiplier, and that's the factor at which our VaR number is then translated into a risk weighted asset number. That has increased as a result of that issue.

On the funding, I would just like to make one point. We are not going to increase the level at which we fund in the market. This is pure internal transfer price mechanism. But what you ought to expect as a result from this is low reliance of UBS in the market on short- term borrowings in the commercial paper market and probably more issuance in some longer term debt. So we will be picking up some additional spread differential credit curve, a differential in the yield curve, but we do not expect this in the external market to significantly change our cost of funds. Internally we will just make it more expensive for our businesses to add assets to the balance sheet, and this behavioral change hopefully, or certainly will make sure that they will have less reliance on our balance sheet going forward, or that they will only rely on the balance sheet for highly attractive businesses.

Christopher Wheeler - Bear Stearns

And Marco, just a follow-up on the capital side. What are you thinking about there in terms of capital allocation. Any changes?

Marcel Rohner - Group Chief Executive Officer

We're in the process of developing models. It's premature to know how exactly we will use them. We believe that the funding and the haircut model; basically we have to treat our trading businesses similar to a prime broker would treat his hedge funds counterpart. It's even a more effective way than a capital allocation scheme but we are starting a capital allocation and hopefully sometime next year we will have more clarity on this issue.

Christopher Wheeler - Bear Stearns

Thank you very much.

Operator

The next question is from Anke Reingen, Execution. Please go ahead.

Anke Reingen - Execution

It's Anke from Execution. First question's on the private bank. Do you see any negative impact from somewhat negative press around your investment bank on your private banking operation? And secondly can you talk a bit about the sensitivity of the weakening U.S. dollar. Is there any time lag in charging clients versus the asset base and also how does this... is any flexibility in the comp or do you neutralize on the private bank for weakening U.S. dollar? And secondly on Basel II, with your tier I ratio of 10.6%, can you be a bit more specific about the potential impact? Thank you.

Marcel Rohner - Group Chief Executive Officer

Let me start with the private bank impact first, and U.S. dollar, Tom, if you can take that, and tier I ratio Marco. In private banking, we have actually had no impact at all clearly we never want to be with a bad headline in the press that we incurred a loss. But what pays off fundamentally is the fact that we strictly run our wealth management business on a arm length's basis as we run our Global Asset Management basis. It's a fully fledged open architecture. It has it's own by-side research and I think this gives us especially during these turbulent times a very good position with respect to our client. So the net result is as you see from the assets we gather that this is actually prospering even more than before and we don't expect, a change there. On the U.S. dollar. Tom?

Thomas R. Hill - Chief Communication Officer

Yeah I said that U.S. dollar, there are really two effects. One is on invested assets, which obviously measured in Swiss francs are less for Wealth Management in the U.S. than they otherwise would have been. And also for the rest of wealth management, which has a substantial amount of its assets in dollar investments. It means the invested asset growth is affected by the FX number. For the P&L normally we have got more revenue in dollars than we have cost in dollars and therefore we would do worse if the dollar went down. And actually this quarter, because the write-downs are in dollars, we gained because the write-downs measured in franks are smaller than they would have been if the dollar had been stronger. So that means it was gain on the quarter net from the dollar being weaker of about 72 million francs compared with what it would have been if we would measured using last quarter's exchange rates.

Marcel Rohner - Group Chief Executive Officer

And Basel II will come into effect next year. UBS is going to use the advanced approach both on the credit risk and the operation risk side. And if you look at the pieces of the business Basel II will be significantly positive leading to lower risk weighted assets for our wealth management and business banking division. It will have a negative impact for the investment bank and then we obviously have the additional added feature of having a new risk weighted asset charge for our operational risks?

Overall, I think until the beginning of this year we thought that the overall impact would be neutral. Based on the latest information and also based on some of these market dislocations we now believe that at most, and what we currently can estimate that the impact would be above 0.5% but not more than that.

Anke Reingen - Execution

Thank you.

Operator

Next question from Ms. Claudia Meier, Bank Vontobel. Please go ahead madam.

Claudia Meier - Vontobel

Yes good morning.

Marcel Rohner - Group Chief Executive Officer

Good morning.

Claudia Meier - Vontobel

And the first question is just a clarification, I did not understand that your super senior exposure of 20.2 billion francs, how it breaks up. I have got the 3.2 million francs in high grade to 13.2 billion francs in mezzanine and what was balancing item please?

Marcel Rohner - Group Chief Executive Officer

The balancing item... let me just... okay it's 3.7, let me just pool the exposure so I can give it to you very precisely. On second... the first one, the 3.7 million francs, I apparently said 3.2 million francs, I apologize, but the 3.7 million francs are high grade, is high grade ABS paper, then we have a second position which is 2.7 billion francs which is a position where we have 12 [ph] loss... first loss protection on.

Claudia Meier - Vontobel

Okay.

Marcel Rohner - Group Chief Executive Officer

So therefore it has obviously a different quality and then the balancing item out of mezzanine and may be ABS CDOs.

Claudia Meier - Vontobel

Okay, thank you. Then I have a third question on investment banking. You have guided that we should assume as the run rate numbers at the beginning of 2006. I am a little bit puzzled. Is this not the 2005 number... don't have the 2005 or the 2006 fixed income number. Can you specify this?

Marcel Rohner - Group Chief Executive Officer

Well... look we all have to live with some uncertainty, you are absolutely right to point that out that you can imagine how hard it is at the moment to forecast for an entire period of 15 months run rate for the business which is why I would position it as a slightly lower than the 206 run rate. Let's put it that way.

Claudia Meier - Vontobel

Okay. And in terms of repositioning of the fixed income franchise, can you give some more details here because I mean, are you just relying on funding at arm's length will be... will help you here or you have... also have new initiatives, are you stopping them or what are you doing here. If you could give some more color, this would be much appreciated.

Marcel Rohner - Group Chief Executive Officer

Yeah I should... preface it is with thing. We are a lot of... organizational adjustments are actually currently underway. So I hope you have an understanding that I can't for a number of reasons obviously not give the details what's going on. But fundamentally even the funding part is an important part. I mean you shouldn't underestimate that the largest as you heard from Marco, the largest part of the balance sheet is consumed by a fixed income and the largest part that the substantial part of the challenges and the issues we face comes actually from that root cause. So this is clearly important. However there are other elements. It also combines fixed income with money market and currency and commodities business and specially the FX money market business, the high volume the lower margin with the industrialized businesses where we enjoy very strong market position that can be more optimally aligned with the other lower margin high volume businesses and fixed income such as government bond trading and other. So we are moving on that part.

We can also... and we are also introducing a much more simplified structure. We had sometimes overlapping activities or had similar risks taking in several parts of the fixed income units which we also aligned by bringing them all together in one place. So we want to stay in and optimize our all margin high rolling more industrialized businesses we want to continue to invest in high margin businesses where we do have strong position such as credit fixed incomes, such as emerging markets, such as structured LIBOR and then we want to adjust to capacity to be commensurate with the current market environment. So clearly fixed income is... among the front offices, thereby far the largest contributor to the head count reduction capacity adjustment and this is the direction of what we do and it will take the center a few weeks to implement and then we will be in a position to report later on in more detail how the structure looks like, all the way with respect to how we represent the profitability which was a question from some other participants before.

Claudia Meier - Vontobel

One last question if I may on the tax rate, can you give an indication please and then it would be all. Thank you very much.

Marcel Rohner - Group Chief Executive Officer

Thanks. Marco?

Marco Suter - Executive Vice Chairman and Chief Financial Officer

I think the indication would be to look at last year's rate as a guidance for this year.

Claudia Meier - Vontobel

Okay. Thank you.

Operator

Our next question is from Mr. Huw Van Steenis, Morgan Stanley. Please go ahead sir.

Huw Van Steenis - Morgan Stanley

Yes, good morning.

Marcel Rohner - Group Chief Executive Officer

Good morning.

Huw Van Steenis - Morgan Stanley

Quick questions. First is on... again on your write-downs. Just give a little color about the super senior risk which was the largest piece. If I asked 1.6 negative impact on the 20.2, it appears you are taking a 7 point mark and yet some of your competitors and probably... whilst I realize the markets are very, very illiquid and have deteriorated. And my sense is some capacities are taking a 20-point packet or more which would imply another 3 billion of write-downs. Perhaps could you give some color on why you wouldn't be more conservative and perhaps whether these are the further write-downs in the current quarter?

Marcel Rohner - Group Chief Executive Officer

Yes, can we do that, and then go to the second because it's just easier for me to follow all the questions. First of all the write-down of 165 goes on largely against the mezzanine which is the 13, so that's an important part to know. And then secondly we also had a 2% protection on the entire portfolio to read-through [ph] in the first place. And thirdly I cant really say what others do. What I can say that some write-downs are as much down to 30% in this portfolio and others are up. So it really depends very much on which vintage you hold, which subordination levels you have, and some have attachment points of 30%, others have attachment points of 55%. So it is a wide range in there which makes it a peak... great deal of difference where you went up with the valuation. Don't really know what others apply but what we can say is our write- downs take over largely against the 13 billion, just to put it a bit in perspective. Again I think it has to be taken with great caution with respect to what it actually is.

Huw Van Steenis - Morgan Stanley

That's extremely helpful. And in terms of... in terms of your guidance to the investment bank is likely to make a loss in the fourth quarter. Of the additional write-downs, I mean would it be fair to say that its against the mezzanine pieces again which would be one position to be looking to have another look at the end of the quarter?

Marcel Rohner - Group Chief Executive Officer

It clearly will be... it will clearly be the mezzanine as a part of the super senior and in there, there are two effects such as mentioned at again, the one effect is the remittance data which affects us the way we model this and the second one is the CDO bucket because these CDOs themselves stay hold usually 90%, 95% RMBS paper. But then they also hold a little bit of CDO paper, so that's a second effect. As I said there is a bit of balancing item because super senior trounces they actually improve in case of a default because they get a better position in an event of default... technical default due to the downgrades.

And the second part that is the remaining 1.8 billion in the CDO warehouse, there you actually have a downgrade effect if there is indeed a technical default and the cash flows are diverted the way from the junior tranche just to the senior tranche then you will actually have a negative impact obviously on the remaining junior tranches; that's where the second part is.

Huw Van Steenis - Morgan Stanley

That's incredibly helpful. And number two; and could you give us some color on your explosion lines you to see and so I don't leave that's in today's presentation.

Marcel Rohner - Group Chief Executive Officer

I acoustically didn't understand exposure to --?

Huw Van Steenis - Morgan Stanley

: See... sorry, commercial mortgage back paper.

Marcel Rohner - Group Chief Executive Officer

Commercial mortgage back paper, yes, we didn't disclosed that number, so far we have... first of all we have actually... now what we have included in these numbers here are the remaining sub-prime related asset backed commercial paper. But there is obviously a portfolio out there we hold as part of our money market business which is commercial paper backed by a variety range of industries. It actually goes, let me just quickly look it up to have it here. It is largely financial sovereign asset, normal asset back to receivables and also other industries. So it's a wide range of paper which we feel very comfortable with.

Huw Van Steenis - Morgan Stanley

Okay. So just declared, at the moment you don't have any concerns of potential impairments from the CNBS portfolio from where you are currently sitting?

Marcel Rohner - Group Chief Executive Officer

No.

Huw Van Steenis - Morgan Stanley

Okay. And then just last one. In terms your tier I ratio, the impact that you have mentioned today about the high risk rate assets in the investment bank from the increase in VaR and VaR multiplier the further fall in the dollar in Q4 presumably have another negative impact on tier I. You start to get quite close to sort of the double digits of number. On what sort of level of tier I would you be comfortable finishing the year with and what other levers are you pulling aside from putting the buyback on hold for instance will you have to significantly cut back risk taking investment bank to try and keep above 10% tier I or how are you thinking about as a team?

Marcel Rohner - Group Chief Executive Officer

Well largely, I'll give first half and then ask Marco to comment further. I am sure he has more to add. But look we clearly want to broadly stay within the range as we currently are. That's clearly our ambition. And what levers can we pull. One is that we keep our risk exposures contained. We achieve that by way of hedging our exposure and therefore having the VaR part, which is actually a strong driver, because we have to change the historical data and the measurement of VaR as we also said before. It's actually a strong driver. So we can hedge this exposure overtime. Obviously, where it's illiquid, it takes some time, but I think we can achieve a reduction there. And we also have some optimization in terms of net gain [ph], which we can do. That takes a little bit more time, because that's labor intense data cleansing exercise, where we can pull another lever to bring it down and we will obviously be able to sell assets, which are not supposed to be on our balance sheet forever. So we will see in our credit fixed income portfolio also trading positions, which we are... as having overtime. These are essentially the key measures that we undertake. Marco?

Marco Suter - Executive Vice Chairman and Chief Financial Officer

I don't really have anything to add to this. One implied comment that you made was that we should be affected by the further decline in the U.S. dollar. First of all I don't know in, which direction the U.S. dollar will go in the quarter, or in coming quarters for that purpose, but we have invested part of our capital in U.S. dollars, so typically our capital ratios are not affected by foreign exchange moves.

Huw Van Steenis - Morgan Stanley

Okay, so just to clarify was there no negative impact in Q3 then from the change in the exchange rate?

Marcel Rohner - Group Chief Executive Officer

That was certainly, if at all, a very, very minor contributor.

Huw Van Steenis - Morgan Stanley

Okay. Thank you very much.

Operator

The next question is from Kinner Lakhani, ABN AMRO. Please go ahead sir.

Kinner Lakhani - ABN AMRO

Yes good morning. I have got two questions, firstly on value at risk. Clearly, there was a very sharp increase in the end of period value at risk, so end of September versus end of June being driven by the interest rates part of things. Could you perhaps elaborate on that in the context of de-risking. And the second question is really on the wealth management side. Clearly with the market turmoil, I am sure there has been some impact on investor confidence. How do you see that feeding into revenue margins in the wealth management business going forward?

Marcel Rohner - Group Chief Executive Officer

On VaR, if it interests... the reality is that the positions are actually by any means a bit smaller or better hedged. The reason why the VaR goes up is simply because we have to update the time series by which you measure the risk. It's a historical simulation. It was in 5-year historical data and when you include the data from the market dislocation, you include an extremely volatile data set, which is then run against our positions, and then we measured the 99% contingency interval. And therefore our VaR goes massively up. And because some of these positions, some of these paper, look at the super-senior AAA paper, they basically had almost no volatility whatsoever in the past five years, but now they all of a sudden start to fluctuate massively. So if you just take away our super-seniors, and every other which we considered clearly non-core and we want to get out of it overtime. These alone absorbs now a quite substantial amount of VaR. The rest of the position is actually trending down slightly. So overall the de-risking has actually been on the way throughout the quarter essentially. And then on Wealth Management Investor Conference, so far that clearly this looming potentially less recession, which would clearly affect probably Investor Conference everywhere in the world. But that has not materialized. The likelihood is higher, we all know. But we don't really know where it gets. Other than that the markets have actually... they have performed fairly well. In many respects, the activities are there. Most of the economies do well especially merchant markets, Europe, euro strength, and in that sense the Investor activity and confidence is still very good.

Kinner Lakhani - ABN AMRO

Thank you for that. Just wanted to come back on the VaR actually. I can understand your explanation, but I am just trying to fit that in with how the averages have evolved, so the averages have declined, but the end of periods have increased very sharply. And that doesn't completely fit in with the kind of time-series explanation?

Marcel Rohner - Group Chief Executive Officer

Let's try. Can you try Mark, but then you have... his words maybe that clarifies maybe I was not clear about what I have said, but Marco can you.

Marco Suter - Executive Vice Chairman and Chief Financial Officer

I think I have said during my presentation take the end of quarter one and it was a better indicator for the average VaR number for let's say the next quarter, because it takes a while for the VaR increase is actually to travel or translate into higher average numbers going forward.

Kinner Lakhani - ABN AMRO

Okay, great.

Operator

The next question is from Mr. Mathew Clark, KBW. Please go ahead sir.

Mathew Clarke - Keefe, Bruyette & Woods

Good morning, a couple of questions. Firstly just on the shift towards more share rewards in the compensation mix. Perhaps with reflect to the 2007 performance period, you could give an idea around how you expect to mix between share rewards and cash compensation to differ from previous years to give us an idea of what kind of burden is going to come in each years. And secondly I just wanted to check whether the shift in mix of compensation towards more share rewards applies to the whole group or it that just to the investment banking division and then secondly just a question on the head count cuts that were announced, the start of the month. How many 1500 expected cuts have been identified. And secondly have you got any ideas as yet on restructuring charge for that. Thanks very much.

Marcel Rohner - Group Chief Executive Officer

Okay the share rewards, the additional future amortization a burden will be approximately plus/minus. There are a number of variables in their, will be approximately 800 million to 900 million. It is only applicable to the investment bank, not to the rest of the group and the head count cuts, this process is actually underway as we speak largely identified, will carry out throughout the quarter. It will be largely done although some people might still be on pay role, first quarter due to the simple contractual arrangements, we have. Restructuring charge... Marco?

Marco Suter - Executive Vice Chairman and Chief Financial Officer

This will be applied to the fourth quarter, the number is not yet final, it will very much depend... the level I have seen, some numbers circulated in the press. Overall I would expect the number to be slightly smaller than the one I have seen. And maybe just one word of caution clarification. The 800 to 900 number that Marcel said before, that's not an annual number. That's an aggregate number which will obviously flow in, you know over a 3-year period or so.

Mathew Clarke - Keefe, Bruyette & Woods

Great thanks. Could you say which publication you read... your...

Marcel Rohner - Group Chief Executive Officer

I have, I have read so many. I don't even remember which one it was.

Mathew Clarke - Keefe, Bruyette & Woods

Okay, thank you.

Operator

The next question is from Mr. John Keyes, Lehman Brothers. Please go ahead sir.

John Keyes - Lehman Brothers

Yeah. Good morning everybody. I had three short questions but let me ask them one at a time. The first question is just to revisit the forecast on fixed income revenues, and a little bit below 2006 where you earned 9 billion, is that after deleveraging the balance sheet by 25% to 30% which you suggest that at 20 basis points might cost you a billion of revenues, in other words the underlying could be closer to 10 billion francs in 2008, which suggests you are actually very bullish about the outlook and the recovery markets.

Marcel Rohner - Group Chief Executive Officer

Yes and no. The yes and no is because this balance sheet reduction... the revenues we have achieved with this big balance sheet were largely day one revenues. So this is actually almost neutral. So you still have to go with the 9 billion Swiss francs and not close it up to 10.

John Keyes - Lehman Brothers

Okay, thanks. And the second question is... just to revisit the compensation cost in the investment bank, the absolute charge this quarter was 1.2 billion both cash and share which is about half the accrual of the third quarter of '06. Marcel has highlighted the difficulty in Q4, keeping that cost down as they need to retain people. Do you think you will be able to keep the absolute cost at around the 1.2 level in Q4, given the need to retain people and how do you think about the compensation cost income accrual for 2008? You know, given the costs which you pushed forward in terms of share based expenses?

Marcel Rohner - Group Chief Executive Officer

Well it, will certainly be a bit... it will certainly be higher than it was in the third quarter. Because we had this effect, this accounting effect Marco was alluding to. It also depends on how we complete the quarter. Only one month in, we have although one hand good results, under one hand difficulties I have addressed which will have a substantial impact on the investment bank as I said, unlike we will be positive and clearly we will drive at the end today we will drive the pool to achieve all the objectives we need to achieve by way of rigorous differentiation. We still want to compensate top performer competitively and protect the franchise. And I think we will have to wait to see how the quarter finalizes to see where we really are.

John Keyes - Lehman Brothers

And how do you think about 2008? Do you think there will be a lots of upward pressure to that line... that ratio?

Marcel Rohner - Group Chief Executive Officer

No, I think we will, hopefully we will be back to more normal territory.

John Keyes - Lehman Brothers

Okay. Thank you. And the final question is just on the dividend. You said last quarter that you could maintain prior year. The current consensus is calling for double digit increase. Do you think that's a realistic expectation given the additional losses you book in Q4 and your current capital position and are you thinking of flat dividend more appropriate given the outlook?

Marcel Rohner - Group Chief Executive Officer

That will be my current thinking.

John Keyes - Lehman Brothers

Right. Thank you.

Operator

The next question is from Mr. Jeremy Sigee, Citigroup. Please go ahead sir.

Jeremy Sigee - Citigroup

Thank you. Just a couple of clarifications ready on the mechanics of the investment banking comp accrual. Could I just clarify the 3Q charge that you've booked. And is that sort of a full quarter of salary with zero bonus accrual or with some bonus accrual or with the net recovery from the bonus pool? First question. And then secondly clarifying that 900 million number. Is that just relating to the third quarter extra share based comp that you referred to. And then final question again on the same topic. In terms of who is taking pain on the compensation pool. How narrowly focused is that, is it just a few traders in DRCM, we'll see low bonuses or is there a broader sharing of the pain?

Marcel Rohner - Group Chief Executive Officer

You'll understand that I am not... I guess many people will be keen to know what the end outcome is of that, but that's a conversation which will have in January with everybody and we want to kick that off now, how that is, but it is I think pretty standard process how these corpuses work in investment banking. With respect to the line... the 900 is for the year, that's an annual number, but then it's obviously a tribute that... now is grossed up for the whole year but it's mostly impact the third quarter. So what you actually see is a base salary number, you see a part of an accrual in there. So it's not zero and then you see a PSR reversal from the increase in the share based deferral.

Jeremy Sigee - Citigroup

Okay, so it's a positive accrual for bonuses, but then there's the PSR reversal?

Marcel Rohner - Group Chief Executive Officer

Yes.

Jeremy Sigee - Citigroup

Okay. Thank you very much for that.

Operator

The next question is from Solveig Babinet, Morgan Stanley. Please go ahead.

Solveig Babinet - Morgan Stanley

I am sorry, the questions have been asked. Thank you very much.

Operator

The next question is from Mr. Stefan Stalmann, Dresdner Kleinwort. Please go ahead sir.

Stefan Stalmann - Dresdner Kleinwort

Yes, good morning. I have three questions please. The first one; a very big picture, you have $20 billion of CDO exposures left on your book. Very hard to get out, very hard to value, I know this is unfair, I guess, to some point but can you give us any reassurances about the worst case losses that you could see piling up on this position maybe over the next few quarters or until this is solved? Second question, do I understand it correctly that you have 16... roughly 16 back-testing violations during the quarter on your bar model? And what does that mean for how you are going to use this model going forward and your risk management approach to market risk and in general and third I'm afraid I did not understand the comment on the dividend for '07, would you mind repeating this? Thank you very much.

Marcel Rohner - Group Chief Executive Officer

First on the worst case number. I think what we do is we provide you with the maximum... really the maximum possible transparencies with the bare bone so you can make your calculation the way you think is appropriate. We feel that the way we go about the modeling of this the way we apply the data which comes in the fundamental data is a reasonable and prudent way forward which will incorporate what we really know in that and you basically see what the results of these procedures are and you also see what there is, at least broadly, I could give you the impact of the recent very extreme rent on what we are having here, and I think the rest we should leave to you because you will see there is a wide range of approaches out there and it would be inappropriate if we just put out the number here which could be taken out of context. On the dividend what we basically say is we most likely order to dividend level of last year because there was a... somebody said there's expectation of a double digit growth. And on the VaR model, Marco could you add on that one?

Marco Suter - Executive Vice Chairman and Chief Financial Officer

You are correct, we did have 16 back-testing exceptions, it's not going to change how we use VaR in the first place because VaR is what VaR is and VaR is a good measure of exposure in normal market conditions which we have always known that VaR has its deficits or rather how people might choose VaR might have its deficits. Obviously what we do next to VAR, we have other means of measuring and controlling risk, one of them is stress loss. And what clearly this episode has heightened is not the way we use VaR, but it clearly has showed us that we have to be probably a little bit more granular in some of our stress-less models. And we certainly have to become better at how we aggregate risks. It's a concentration risk element, which is not picked up in VaR, but which should be picked up by alternative risk measures that need to be sharpened up.

Stefan Stalmann - Dresdner Kleinwort

Thank you very much

Operator

The next question is from Mr. Peter Thorne, Helvea. Please go ahead sir

Peter Thorne - Helvea

Yes just a couple of questions on the reduction in the assets in the investment plan please. I mean could you just give us some indication of how much the risk weighted assets would be reduced when you take the total assets down by up to 30%, or maybe how much capital there could be released from doing that. And secondly are you going to do this by [indiscernible] or do you just hope that the behavioral aspects of charging a higher price for the funding is going to do it. It seems strange have such a high target, and just hope behavior is going to get there. And then finally when you do manage to reduce the assets, it's just because they have going to mature and you just are not going to renew them, or you are going to have to sell them. And if you had to sell them, should we be concerned that you are going to find that the market prices aren't quite what you believe they are in the balance sheet at the moment?

Marcel Rohner - Group Chief Executive Officer

First of all again on the balance sheet reduction, it will not contribute substantially to risk-weighted assets, because a lot of the balance sheet usage actually does not attract a lot of risk-weighted assets, There is one difference, which is now, as we have just disclosed today such a super senior position, which actually renew data, which is much more volatile. Actually it does create VaR, but as you know this will take time until such position is actually then rolling off, or more hedged, or whatever we can take. We are not basing the balance sheet on pure hope, although, you should understand that if you have a very, very high volumes transactions, which are on a very small margin, once that's margin is negative, you can be assured that there is it is not going to be put on again because people will simply lose money if they do that in their respective business units. So this is important at the same time, we will also operate the limits in order to achieve our objectives. There will be a contribution of assets which will roll off clearly, that's also a contributor to the Golfer 5 [ph] sale prices. No of course not. That's not something we think we need to do with limits with roll off, with normal trading, with absorbing what the market liquidity can do, but by optimizing the balance sheet also in categories where we are simply out-sizing anybody by a factor of 1.5 or 2, such as tradable assets, trading inventories, and other things, we believe it can run our business very effectively without using this resource to the degree mentioned.

Peter Thorne - Helvea

Thank you.

Operator

The next question is from Mr. Kian Abouhossein, JP Morgan. Please go ahead sir.

Kian Abouhossein - JP Morgan

Yes I have a follow up question. I would really like to get some clarification on your guidance for fixed income revenues. If you look at 9 billion, I mean you are going to lose over 1 billion Swiss francs from your assets reductions. You are probably not going to make over 1 billion francs anymore from the old Dillon Read business. Your very big rates player and FX players rates must be one of the best yet ever that we have seen in history. So I am very surprised that you talk about 9 billion francs for potential guidance for aid and fixed income. Is that really realistic?

Marcel Rohner - Group Chief Executive Officer

First of fall, this is Swiss Francs. I think somebody said. And I think, and I said it will be lower, it will be lower than that. Our 2005 dollar revenue was in third quarter 6 billion francs, 2006 were 7.3 billion francs, and I said it will be lower than the 2.6 billion francs in dollar. That's what I said. And I think, we should leave it with that. I also mentioned that it's very hard to make now in these market environments in the middle of a repositioning exercise, a more reliable forecast about that, For us, it wasn't... as you know we had substantially small revenue contribution from fixed income businesses than our competitors. So we're not talking about the all time high, you've probably observed in other businesses.

Kian Abouhossein - JP Morgan

Sorry... so it will be below just to get this clarified, it will be below the '06, number, which was 9 billion.

Marcel Rohner - Group Chief Executive Officer

No it was 7 billion

Kian Abouhossein - JP Morgan

In dollar terms, yes.

Marcel Rohner - Group Chief Executive Officer

Okay and I... so that's I think where we should leave this one.

Kian Abouhossein - JP Morgan

Okay, thanks.

Marcel Rohner - Group Chief Executive Officer

Thank you. I guess there is no further question. I would like to thank you for participating at this conference call. And we will talk to you again in later communication activities and after next quarter. Thank you very much.

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Source: UBS AG F2Q07 (Qtr End 9/30/07) Earnings Call Transcript
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