Intervention by central banks has staved off a crisis, but investors need to know more about the true state of U.S. mortgage markets before calm can be restored to markets, a top manager at UBS said.
The original driver of this is the subprime markets in the U.S., and that is clearly an evolving scene, said UBS Chief Financial Officer Clive Standish in an interview.
UBS issued a warning on Tuesday that its investment banking business would be badly hit if turbulent market conditions, fuelled by a meltdown in the U.S. subprime mortgage market, continue in the third quarter.
The point is it is evolving. The more information we have, the more the likelihood there will be less speculation and more stability.
Standish welcomed the intervention of central banks to provide liquidity, saying it had produced a little stability in terms of the system being able to fund itself sensibly.
Market fears have escalated in recent weeks, spreading contagion to equity markets, because investors feel they are in the dark about the extent of exposure by financial institutions to subprime and other risky asset-backed securities.
The market is spooked by what it thinks it does not know more than by what it knows, said Standish.
He said it was positive that banks that had experienced difficulties with funds were making that public.
We have seen computer-driven prediction-type funds ... experiencing dislocation in their pricing, said Standish. The fact that these are coming out of the woodwork is a wholly positive aspect.
A number of Wall Street firms have had to step in to shore up hedge funds, which have been sent reeling as the crisis in subprime market has deepened.
Goldman Sachs said on Monday that it and investors including American International Group Chairman Maurice Hank Greenberg would pump $3 billion into a hedge fund that plunged about 30 percent last week.
UBS's Dillon Read Capital Markets hedge fund was one of the first hedge funds to run into difficulties after the U.S. subprime market started to unravel.
UBS said after unveiling strong second-quarter results on Tuesday there would be no further costs arising from Dillon Read after it took a pretax charge of 384 million francs to close down the business.
It appeared that investors who had run into the biggest problems with subprime were those who built up excessive exposure to instruments they did not fully understand.
The learning is all about the concentration of risk and a clear understanding of what the underpinning securities genuinely are, said Standish.
Did people in XYZ in Japan, Australia or Germany understand what they were fundamentally doing was investing in people's mortgages in America and in a sector where they were of a lesser quality borrower?