UBS, BlackRock: Another I-Bank Shell Game

Once again, as with Citigroup (C) and several other large investment banks, we have a troubled entity that sells risky assets but fails to truly sell the full risks associated with them - presumably under the impression that we investors are not swift enough to catch which shell they have hidden that little red ball under.

UBS (UBS) sold $15 billion of mostly subprime (junk) assets to BlackRock (BLK), while financing $11.25 of it (75%). So, the assets are gone, but the bank is still on the hook for $11.25 billion through the loan. If it is a recourse loan, they are using this depreciating stuff as collateral (some indirect market risk) and they have the credit risk of the counterparty. If it is non-recourse, well, that speaks for itself. In addition, they probably sold it at a discount, hence took the loss there as well.

I am not saying the deal will blow up, but the risk of the assets were not really transferred off of the banks books. Would UBS normally offer a loan of this type with these terms for subprime assets in this environment? I doubt it.

From CNBC:

UBS financed 75 percent of the funding used by U.S. asset manager BlackRock to buy a $15 billion portfolio of distressed U.S. real estate assets from UBS, the bank said on Wednesday.

UBS completed the deal by providing $11.25 billion in loans to BlackRock, the Swiss-based bank said in a statement.

BlackRock raised $3.75 billion in equity from investors to pay for the rest of the package, UBS said.

Investors have welcomed the deal as a way for the troubled wealth manager, the world's largest, to prune its balance sheet and shed the type of assets that made it Europe's biggest
casualty of the subprime crisis.

UBS said the vast majority of the positions sold to the BlackRock-led group were subprime assets -- the lowest quality of real estate loans, and so-called Alt-A assets -- ranked one step above subprime, in roughly equal parts.

The remainder was ranked prime.

By publishing the financing details and the composition of the assets, UBS is providing more clarity to investors seeking more transparency about the structure of the deal.

Further terms of the deal were not disclosed.