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HBOS, UBS and Sants

• Robert Peston
• 21 May 08, 08:29 AM

For months now, bankers have been taking some small comfort from the nature of their .

They have suffered markdowns, but these are not real cash losses. They are reductions in the market value of securities backed by subprime, to reflect a fall in the market price.

And that fall in the market price has been exaggerated, or so the argument runs, by the total evaporation of liquidity in these markets.

So in theory, the final losses suffered by banks could turn out to be much less than the losses they've announced, if the banks were to hold their subprime securities till all the borrowers of subprime money have either repaid or till those borrowers have defaulted and had their respective properties seized and sold.

That was, for example, the implication of a recent analysis by the Bank of England, which said that it thought subprime was being priced at a level that was surely lower than the underlying economic reality would justify.

So that's the context for assessing the significance of this morning's by , the giant Swiss bank, that it has sold $22bn of subprime, Alt-A (a grade of US mortgage debt just a bit better than subprime) and prime mortgage-backed securities for $15bn.

It represents a loss for UBS of $7bn or 32% - not a notional accounting loss, but a real loss of hard cash.

And to add insult to very genuine self-inflicted harm, UBS is providing an $11.25bn loan to the buyer of all this stinky US mortgage debt, which is the fund management group BlackRock.

So UBS has suffered a genuine, eye-wateringly large loss on the sale of assets it should never have accumulated, but is remaining exposed to those assets to the tune of $11.25bn.

As I write, my brain can't quite come to terms with the extraordinary financial implications of all this, even though the terms of the deal have been known for some time.

Does it mean that the credit crunch must be nearing an end, when there is such an extraordinary example of what investors call "" by UBS?

Or does it mean that we're still at the end of the beginning, in that it's impossible to do an arms length deal even at a knockdown price?

The same question is posed by yesterday's deal that reopens the British mortgage-backed securities market, ' piddling sale of 拢500m of securities backed by prime UK mortgages.

It's the first sale of mortgage-backed bonds by a British bank since last August.

But the amount is a fraction of what HBOS would typically have sold before the market shut down. And HBOS is paying an extraordinary amount for the money - 0.85 percentage points above LIBOR, even though the 拢500m is backed by mortgages worth about 拢800m.

It shows you how much international investors fear the prospects for the British housing market if they are only prepared to lend money to HBOS at more than 6.5%, even when the collateral is worth between 30 and 40 per cent more than the loan.

That is scary.

Which brings me to the question of how we shut the stable door now that the horse has bolted and taken up tax residence in Monaco.

, the chief executive of the Financial Services Authority, told a fund managers' dinner last night that the City watchdog would consider the implications of how banks pay their star bankers when assessing the financial risks being taken on by those respective banks.

The implication is that if the FSA believes bankers are being incentivised to do reckless or imprudent deals, their respective employers would have to hold additional capital to compensate for those incremental risks.

That would make it much more expensive for any bank to promise its top bankers that they can personally trouser squillions from making big bets with that bank's balance sheet, but that the bankers won't suffer the losses if the bets go wrong.

As my recent 成人论坛2 documentary, Super Rich: the Greed Game, showed, this asymmetry between bankers' personal rewards and risks was an important contributor to the bubble in financial and asset markets that led directly to the credit crunch.

UBS has today put on display the full horror of its losses on its exposure to US subprime - but quite how big were the rewards paid to the bankers that created this disaster?

Last night's remarks by Sants indicate the FSA would be prepared to be more interventionist in re-introducing common sense into bankers' remuneration structures than he originally indicated he wanted to do.

Only a few months ago, he told me that he hoped banks' shareholders would put pressure on banks' executives to bring an end to the madness of bankers being paid huge bonuses on the basis of the notional profits they generate, rather than after years have elapsed to genuinely assess whether their respective deals make sense.

It appears he's having doubts that the banks' owners will sort this out without a little nudge.

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