Every day that passes seems to provide us with another instalment of the Credit Suisse bailout saga. A bank that as recently as 2022 was rated by the Financial Stability Board (FSB) as one of 30 banks that are Global Systematically Important Banks (G-SIBs) was first offered a bailout by the Swiss National Bank, and then within a day was taken over by its biggest domestic rival, UBS.
The irony here is that UBS had over-exposed itself during the 2008 financial crisis and had needed help from the Swiss National Bank while Credit Suisse had weathered the 2008 storm much more successfully. How things have changed.
$3 Billion is a Bargain?
It appears the takeover deal was brokered by the Swiss financial authorities. On paper Credit Suisse would appear a bargain – with a total market cap of $8 billion and a ‘supposed’ purchase price of $3 billion. However, UBS didn’t make a move for its rival. Rather it was bought to the table by the Swiss authorities desperately firefighting in the country’s banking sector.
The deal struck shows just how far Credit Suisse had got itself into financial problems. No money passed hands for the purchase. Instead, shareholders of Credit Suisse got 1 UBS share for every 22.48 shares in Credit Suisse.
Credit Suisse had been losing customers deposits at a significant rate since October 2022. This was made worse by the Silvergate, First Signature and Silicon Valley Banks all going under.
The worry for UBS was that taking on Credit Suisse could imperil their finances. As the combined banks hold wealth equal to 140% of Swiss GDP it was of tantamount importance that the newly enlarged UBS group didn’t fail. As a result, the Swiss authorities have set up a fund of $173 billion to cover loans and guarantees. $9.7 billion has also been promised to cover the losses of unwinding the derivatives portfolio of Credit Suisse. The numbers are staggering.
For those who bought Credit Suisse AT1 bonds the news is very bad. UBS would not take on the debts these bonds represented. They struck a deal whereby the government would decree the $17 billion worth of bonds as worthless.
As I mentioned in my previous post on the enfolding financial crisis, it is that the sudden hikes in interest rates caught many banks over-exposed to low yielding government bonds that were being devalued by new government bonds offering much higher returns indicative of the interest rate increases.
Knowing the percentage of funds sunk into these low yielding government bonds of a bank will tell you the extent of their financial woes. Analysts have already identified 30 other banks that could face huge liquidity issues if they have to sell these bonds at a loss to meet demands by depositors to withdraw their funds.
Not a Credit Suisse Bailout
Optics are everything when dealing with financial markets. If people perceive risk, they withdraw their investment. If they perceive opportunity, they invest their cash. It is thus crucial for the Swiss Banking Sector to spin Credit Suisse’s takeover as ‘a corporate acquisition’ by UBS rather than a ‘bail out’ brokered by the Swiss authorities. However, as we have seen, UBS has swapped shares to acquire Credit Suisse rather than pay cash. Moreover, they first gained assurances of a huge bailout fund for the likely eventuality many of Credit Suisse’s investments turn toxic. Especially the AT1 bonds which in a pre-emptory move to quash panic withdrawals have been written off.
The whole situation gives the impression of firefighting. The Swiss National Bank has pledged vast sums of money for the Credit Suisse bailout in the hope of stopping the rot. Other Global Systematically Important Banks will be paying careful attention to how the UBS Group performs going forward.