UBS sinks in writedown swamp

The latest earnings report from Swiss banking giant UBS (UBS) shows the pain of the U.S. housing bust is far from over. UBS said Wednesday morning its fourth-quarter financial report will include a $14 billion writedown tied to the plunging value of the firm’s holdings of mortgage-related securities. UBS said $12 billion of the writedown comes “on positions related to the U.S. sub-prime mortgage market,” and the rest on other positions related to U.S. residential mortgages. Last month, UBS projected its fourth-quarter writedown would be $10 billion. In adding to its losses on U.S. housing bets, UBS joins Citi (C) and Merrill Lynch (MER), both of which posted bigger-than-expected fourth-quarter losses earlier this month.

Adding to the gloom over the banking sector, Oppenheimer analyst Meredith Whitney says UBS, Citi and Merrill could be in for billions of dollars of additional writedowns this year tied to problems at the bond insurers Ambac (ABK) and MBIA (MBI). Whitney says she doesn’t believe a bailout of the insurers is likely to come to pass, which could lead to some $40 billion in 2008 writedowns at big banks - the majority of which would be taken at Citi, Merrill and UBS.

 ”While we had previously believed the monoline insurers MBI and ABK were too important to fail due to the threat of systemic risk and thus would likely be bailed out,” she writes in a report Wednesday, “we no longer think systemic risk is even realistic or a bailout of the monolines even viable.” Additional writedowns could bring the big banks back to the trough for more capital, even after a two-month span that has seen the Merrill-Citi-UBS trio dilute shareholders by raising tens of billions of dollars. No wonder financial stocks were selling off Wednesday morning - even as rate-cut relief looms this afternoon.