At UBS (NYSE: UBS) it all hit the fan today. Marcel Ospel, the bank’s chairman, is on the way out. The financial firm wrote-off another $19 billion. The company plans to raise $15 billion after a Q1 loss of about $12 billion.

The most hopeful take Wall St. can have is that problems at US banks and brokerages are not as bad. But, the truth is that they could be worse. Goldman Sachs recently wrote that total write-offs for subprime and other bad credit will hit the system for $460 billion. Only $120 billion of that has been written off.

Investors would need to hope that the class of assets held by UBS are radically different from what Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), Merrill Lynch (NYSE: MER), and other US financials have. That is possible, but not likely.

US financials have other exposures. Hedge funds had their worst Q1 in recorded history. Much of the capital base of that industry is borrowed from banks. In liquidations it is likely that not all of that will come back.

The press has not written much about SIVs, but they still exist in relatively large numbers. Some will fail because of their own derivative paper investments. Banks will end up bailing more of them out.

There are still great unknowns. The credit-default swaps market helped sink Bear Stearns (NYSE: BSC). According to The Wall Street Journal "Such swaps were written against $45 trillion of underlying debt as of the first half of 2007." If junk bond defaults go up, and they will, this market will get hit very hard. Banks and brokerage companies play in this sector, too.

If the Goldman estimate is even close to being true, US financial companies may still face $200 billion in write-offs. The flight of capital to 10-year Treasuries recently say that the "insiders" in the market think something is wrong.

Even Einstein, if he were still with us, could not plumb the depths of these troubles, but count on this. The largest banks and US brokers could face as much as $15 to $20 billion more in write-offs each. Given the states of the housing, LBO, credit swap, and hedge fund markets, it is not just possible, it is probable.

For a firm like Citigroup that could mean raising another $10 billion or more. The dilution could take that stock down to $15, if shareholders are lucky.

Douglas A. McIntyre

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