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