The Subprime Rally

The stock markets yesterday looked like an April Fool's hoax. Swiss banking giant UBS reported a further $19 billion hit from the credit crisis, doubling its write-down from last year, and yet its shares soared 12.3%. What's more, UBS also triggered a rally among other European financials, even as it became the bank hardest hit by the subprime crisis.

It's not that the credit crunch has reversed basic investment logic. Instead, UBS's openness has fueled investors' hopes that the worst might be over. And that's as good as it gets these days. As investors reward the Swiss bank's efforts to come clean and cheer the departure of Chairman Marcel Ospel, also announced yesterday, it could be encouraging others to follow suit. Hard on the heels of the UBS news, Deutsche Bank yesterday reported losses of $3.9 billion. Its share price ended up 3.9%.

The subprime meltdown has eroded trust among financial institutions. Banks suspect each other of hiding bad loans, freezing up the credit market. Candor like UBS's is what will start to help restore that trust. In another sign of renewed confidence, four leading international banks will underwrite a $15.1 billion rights issue UBS plans.

The faster the credit cadavers float up from the bottom, the faster the market can be revived.