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TEXT THREE Controled bleeding or cauterisation? That was the unappealing choice facing UBS, a Swiss bank which has been badly hurt by the carnage in Americas mortgage market. The bank opted for the latter. First it opened the wound, by announcing a hefty $10 billion write-down on its exposure to subprime-infected debt. UBS now expects a loss for the fourth quarter, which ends this month. Then came the hot iron: news of a series of measures to shore up the banks capital base, among them investments from sovereign-wealth funds in Singapore and the Middle East. Bad news had been expected. UBSs third-quarter write-down of over SFr4 billionin October looked overly optimistic compared with more aggressive markdowns at other banks such as Citigroup and Merrill Lynch. Steep falls in the market value of subprime debt since the end of the third quarter made it certain that UBS would take more pain, given its sizeable exposure to toxic collateralised-debt obligations . Analysts at Citigroup were predicting in November that write-downs of up to SFr14 billion were possible. Why then did this new batch of red ink still come as a shock? The answer lies not in the scale of the overall loss, more in UBSs decision to take the hit in one go. The banks mark-to-model approach to valuing its subprime-related holdings had been based on payments data from the underlying mortgage loans. Although these data show a worsening in credit quality, the deterioration is slower than mark-to-market valuations, which have the effect of instantly crystallising all expected future losses. | 
