atans1

GIC’s dog investment will be less profitable

In Banks, GIC on 05/10/2010 at 5:54 am

Switzerland has proposed new rules that will make UBS less profitable. As GIC is 45% underwater on its UBS investment, this means it may take longer for GIC to breakeven on this dog with fleas. MM’s talk of 30 years may be an understatement. And he was talking of profit not breakeven.

And GIC may have to invest more in UBS if it decides that it wants to maintain its present holding. These rules means UBS will have to raise capital.

Finance 101: the more capital is required to hold, the less funds it has to make money because capital has to be invested in very safe assets, normally government bonds of the supervising country.

UBS and Credit Suisse will have to accumulate billions of francs in extra capital under proposals from a Swiss expert group on the role of banks deemed “too big to fail.”

The recommendations will oblige Switzerland’s two top banks to maintain supplementary national capital standards far in excess of the Basel III rules agreed by international regulators last month. note

The proposals will oblige the banks to hold total capital equivalent to 19 per cent of the risk weighted assets on their balance sheets, based on their current figures.

Under the proposals, the first 10 per cent of capital will have to be strictly defined “common equity” – meaning capital of the highest quality. The requirement is three percentage points more than the 7 per cent proposed under Basel III for banks to pay bonuses. FT reports.

Related posts

http://atans1.wordpress.com/2010/10/01/gics-loss-on-ubs-and-citi-investment/

http://atans1.wordpress.com/2009/11/24/where-value-investing-can-go-wrong/

The second link talks abt GIC’s and Temasek’s pre -crisis strategy of investing in efficient (in hindsight thinly capitalised) banks.

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