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Banks Still Under Enormous Pressure


Shareholders will be subordinated until the coast is truly clear.

I think UBS's (UBS) results are somewhat unique.

Like Jefferies (JEF), UBS benefited from all the global equity issuance fees paid during the second quarter. At the same time, though, its core business (secret Swiss bank accounts) is under enormous pressure; as a result, the firm is losing both assets under management and deposits -- in droves.

I think it's important to recognize that, while it's still publicly held, UBS is effectively a "marionette bank"; its strings are pulled by the Swiss Central Bank. And regulators undoubtedly want the bank to have more capital, not less -- particularly since the global bank dwarfs the domestic Swiss economy.

As a general rule, I think banks that report losses this quarter will be required to raise a commensurate amount of equity to at least stay even. At the same time, I would caution that profitable banks will be under enormous regulatory pressure to build reserves and take whatever restructuring charges necessary to prepare for the future.

Notwithstanding positive comments from the Federal Reserve earlier this week, the regulators know that the economic storm hasn't completely blown over -- and they'll require banks to subordinate the interest of shareholders until they're certain the coast is really clear.
Position in SPY options and JPM debt obligations
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