Abstract

The case examines the impact of the subprime mortgage crisis in the US on the Switzerland-based banking major, UBS AG. UBS’s exposure to the subprime mortgage market came to the fore in mid-2007 when it announced the closure of its hedge fund, Dillon Read Capital Management. By the end of 2008, UBS’s exposure to the subprime mortgage market was valued at Swiss Francs (CHF) 45 billion. In the financial year 2008, UBS reported a net loss of CHF 21.3 billion, the biggest ever annual loss reported by a Swiss company. The case includes a detailed note on the subprime mortgage crisis in the US and how UBS incurred significant losses due to its investments in asset backed securities that included commercial and residential mortgages. It also examines how UBS was bailed out of the crisis by the Swiss government and the Swiss Central Bank.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the reasons that led to the subprime mortgage crisis in the US and its impact on the financial institutions. Appreciate the importance of an effective risk management system in the financial institutions. Study the drawbacks of high leverage

Keywords

UBS AG, Subprime Mortgage Crisis, Risk Management, Dillon Read Capital Management, Hedge Fund, Mortgage-backed Securities, Liquidity Management, Structural Issues, Fixed Income Trading Business, Structured Debt Products, Long Term Capital Management, PaineWebber Inc, Wealth Management, Asset Management, Fed Funds Rate, Credit Default Swap, Mortgage Lending Mechanism, Reference Linked Notes, Collateralized Debt Obligation, Investment Bank, Swiss Federal Banking Commission, Analyzing, Measuring, and Reporting Risk, Group Internal Audit