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Today's announcement that UBS AG (NYSE: UBS) will take a $10 billion write-down of its risky "super senior debt" and collateralized debt obligations (CDOs) -- is just the latest in a string of announcements where the false prosperity of borrowing comes face to face with the true prosperity of Asia and the Middle East, which have been enriched by high oil prices and Chinese commodity demand.
Just as Citigroup Inc. (NYSE: C) received a $7.5 billion capital infusion from Abu Dhabi Investment Authority a few weeks ago, UBS got $11.5 billion from the Singapore Investment Corporation (GIC) and a Middle East investor believed to be the government of Oman.
With our $9 trillion in government debt, hundreds of billions in government deficits, $2.4 trillion in consumer installment debt, and $1.3 trillion in subprime mortgages, it's been easy to create the illusion of prosperity. But when it comes time to pay off that debt, those whose prosperity results from charging more for a product than it costs them to make it, rather than borrowing, end up in the driver's seat.
And that's why Asia -- with its cheap labor costs -- and the Middle East -- with its enormous oil resources whose prices have been driven up by U.S. military policy and Chinese and Indian demand -- are now buying up big chunks of the global banking system for a song.
As other banks struggle to put a value on their Level 3 assets -- including the "super senior debt" and CDOs that dinged UBS -- we'll continue to see control of the global banking system shift from those who create the illusion of prosperity with debt to those whose actual prosperity comes from profits.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in UBS.
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