According to The Wall Street Journal, Swiss bank giant UBS (NYSE: UBS) will announce a tremendous loss for the third quarter. The problem is primarily in its fixed income division, which holds, among other things mortgage-related assets.

The loss will be in the $510 million to $600 million range, based on a write down of assets that could be six times that large. The Journal writes that the "losses resulted from applying sharply lower market values to asset-backed bonds."

And, that is the core of the matter. Some of the fixed income instruments held by banks cannot be sold right now, or would have to be sold at a huge discount. Banking accountants use models to set asset values for reasons of earnings reporting, but those numbers are based to some extent on theory.

The problem is acute enough that it could spread to big U.S. money center banks like Citigroup (NYSE: C) and Bank of America (NYSE: BAC). After suffering sharp declines in August, Bank of America is now down only 5% for the year. Citi has not recovered as well and is off 15% over the same period.

Bad news out of a major U.S. bank would almost certainly cause the firms to test their lows again.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Does UBS's Q3 loss mean trouble for U.S. banks? originally appeared on BloggingStocks on Sun, 30 Sep 2007 21:45:00 EST. Please see our terms for use of feeds.