A Swiss Avalanche and Crisis in Banks
In the Swiss Alps, the Avalanches occur this time of year. After the winter’s snow has fallen and temperatures warm. As a Swiss, I can say the Swiss are very well prepared, for this event. The unfolding crisis in banks, less so as can be seen in the events leading to this dramatic event. Which resulted in the takeover of Credit Suisse by UBS. Over 167 years of Swiss Banking history has been eliminated, in one weekend. But was it that quick? The analogy of an avalanche, the rapid flow of snow down a slope, in a mountainous terrain, is an appropriate one. The events impacting Credit Suisse have been accumulating for years.
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SCANDALS
Here is a list of the various scandals over the past 10 years. Like the snow leading to an avalanche, a disastrous series of events has been accumulating. The unfolding events, which started in California, led to the crisis in banks and pushed Credit Suisse over the edge.
US Tax Evasion:
In 2014, Credit Suisse pled guilty to helping rich Americans in evading taxes via offshore accounts. Credit Suisse agreed to pay a $2.6 billion fine to US authorities.
Dark Pool Trading:
Credit Suisse paid the SEC $84.3 million in 2015, the payment being to settle claims. The claim was that Cedit Suisse managed a platform with internal biases. The platform favoured high-frequency traders, to the detriment of ordinary investors.
FIFA Bribery Scandal:
In 2016, Credit Suisse was accused in a bribery scandal involving FIFA officials. The scandal involved television rights for football matches. Credit Suisse was faced with the following allegations. Credit Suisse aided in the $2 million in payments to acquire television rights.
Mozambique Debt Scandal:
In 2019, Credit Suisse was sued by US regulators for its role in a scheme. The scheme was to lend USD 2 billion for projects in Mozambique. The projects were allegedly masking bribes and kickbacks to corrupt local authorities. Credit Suisse was accused of aiding in the arrangement of loans used to finance projects in Mozambique. In a joint investigation by the US and the UK, Credit Suisse was fined a total of USD 536 million for their role in the scam.
Spying Scandal:
In 2019, Credit Suisse was accused of spying on former bank executives. This included the previous head of human resources, to find out if they were attempting to poach staff or clients.
Wirecard Scandal:
In 2020, Credit Suisse was one of several banks that gave finance German payments firm Wirecard. Wirecard was accused of major accounting fraud and has been closed.
Archegos Capital Management Scandal:
In 2020, Credit Suisse offered prime brokerage services to a family office called, Archegos Capital Management. Archegos was a family office that got into difficulty in March 2021. The group was forced to liquidate its investments due to a series of margin calls. Credit Suisse faced enormous losses as a result of the liquidation.
Greensill Capital Scandal:
In 2021, Credit Suisse was one of the institutions that gave capital to Greensill Capital. This was a supply chain finance company. The company failed in March 2021. Credit Suisse had to freeze USD 10 billion in investor funds. Funds that had been invested in Greensill’s goods.
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THE NUMBERS
The crisis in banks came to a head over the weekend. The Swiss National Bank, the Federal Reserve and the ECB were all involved. There were likely three solutions that I could think of.
- Credit Suisse would fail
- A major foreign bank would be Credit Suisse
- USB would play a role
In the end, the USB solution, was the only solution. Towards the end of last week, Credit Suisse had received a USD 54 billion credit line. This was from the Swiss National Bank, Switzerland’s central bank. If not for this, Credit Suisse’s 167-year history would have been lost to a bankruptcy declaration. The line of credit was an effort to reassure markets and depositors.
In the end, it failed to prevent a rush of customer withdrawals. Thus, the Swiss government proposed the once unthinkable. Credit Suisse’s major competitor over its long history, UBS, was to be the saviour.
The Deal is as follows
All shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. This is a merger consideration of CHF 3 billion for all shares in Credit Suisse.
The merger is expected to be completed by the end of 2023.
The Swiss National Bank will grant Credit Suisse access to its liquidity facilities. They will provide substantial additional liquidity.
- For the seamless integration of Credit Suisse into UBS, UBS is expected to appoint key personnel to Credit Suisse. This will be done as soon as possible.
- Credit Suisse continues to operate in the ordinary course of business. It put in place its restructuring measures in collaboration with UBS.
- UBS has expressed that the employment of the staff of Credit Suisse will continue.
- FINMA informed Credit Suisse that it has determined that it’s Additional Tier 1 Capital, are worthless. Thus, approximately CHF 17 billion value will be down to zero.
- UBS will assume up to CHF 5 billion Swiss francs in losses. Both banks will receive CHF 100 billion in liquidity assistance from the SNB.
In early trading Monday, Credit Suisse shares were down 67% and UBS down 8%. The deal saving Credit Suisse from bankruptcy likely saved spreading further financial contagion. This could have created a GFC 2023. The international banking system was already facing uncertainty. Due to events in the U.S, the collapses of Signature Bank, Silvergate Capital and Silicon Valley Bank.
THE CRISIS IN BANKS AND THE WEDDING
Is this a classic “shotgun wedding” designed to resolve the crisis in the banks? What does UBS get from the deal? Credit Suisse’s total assets, amounted to over USD 600 billion, compared to UBS at USD 1.1 trillion. There are two main advantages for UBS. First, UBS has the opportunity to significantly increase two key aspects. Total assets will be around USD 1.7 trillion in line with other major world banks with total assets. In the asset management business, UBS will have total assets under management of USD 5 trillion. Second, operating leverage and significant synergies can be achieved within the Swiss domestic market. They could be exceptionally high. For Credit Suisse’s shareholders, their shares fell 67%.
Market sentiment improved dramatically following the deal, and the crisis in banks could be resolved. The deal will limit contagion through the financial system. Continued access to the USD across the global financial markets was ensured. This was done via a USD swap agreement. The Federal Reserve, the ECB and other central banks will raise the frequency of 7-day maturity operations. This will be from weekly to daily. In an effort to alleviate mounting pressures in the global financial system. The Swiss National Bank promised access to liquidity facilities of CHF 100 billion. This will be for both banks involved in the transaction.
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A DEAL, A MERGER OR TAKEOVER
Some commentators say that UBS managed to negotiate the deal of the century. This deal was available due to the unfolding crisis in banks. UBS Group chairman Colm Kelleher spoke of “enormous prospects” through the takeover. He also stated that Credit Suisse’s investment banking operations would be downsized. This means a reduction in jobs both in London and New York. UBS has a much more conservative risk culture. The Credit Suisse Investment Banking operations will be in alignment with this.
The comments coming from Credit Suisse’s Chairman, Axel Lehmann were much different. He described the situation as “historic, painful, and very tough” for his bank and the global market. But admitting that this was the best possible outcome. In a statement, Mr. Lehmann said that. “While the team has worked relentlessly to address many key legacy challenges. And to execute on its new plan. We are obliged to negotiate a solution today that yields a long-term consequence.”
Let’s take a look at what was stated on the websites of both UBS and Credit Suisse.
UBS Website – UBS to acquire Credit Suisse
- Transaction creates significant sustainable value for UBS shareholders.
- Creates leading global wealth manager with USD 5 trillion of invested assets across the Group.
- Extends UBS lead in Swiss home market.
- UBS strategy unchanged, including focus on growth in Americas and APAC
- Attractive financial terms, which include downside protection
Annual run-rate of cost reduction of more than USD 8 billion expected by 2027 - UBS remains strongly capitalised, well above our target of 13% and is committed to a progressive cash dividend policy
- A focused Investment Bank, remaining committed to UBS’s model; strategic Global Banking businesses to be retained, majority of Credit Suisse markets positions moved to non-core.
UBS plans to acquire Credit Suisse. The combination is expected to create a business with more than USD 5 trillion in total invested assets and sustainable value opportunities. It will further strengthen UBS’s position as the leading Swiss-based global wealth manager with more than USD 3.4 trillion in invested assets on a combined basis, operating in the most attractive growth markets.
The transaction reinforces UBS’s position as the leading universal bank in Switzerland. The combined businesses will be a leading asset manager in Europe, with invested assets of more than USD 1.5 trillion.
UBS is very clear, this is a takeover and is or has to be very happy about it. I think very happy. At the heart of the deal is Credit Suisse’s lucrative domestic bank. This alone is likely to be worth multiples of the whole purchase price. UBS was considered a winner in the merger.
Let’s take a look at the Credit Suisse website
Following the intervention of the Swiss Federal Department of Finance, the Swiss National Bank and the Financial Market Supervisory Authority (FINMA), it was announced on Sunday, 19 March, 2023 that Credit Suisse and UBS have entered into a merger agreement, with UBS being the surviving entity. After an examination of various scenarios, it was agreed that this merger is in the best interest of clients, investors and other stakeholders, and will help to restore confidence and stability to the financial markets.
Until the completion of the merger, which is subject to customary closing conditions and is expected to be consummated by the end of 2023, Credit Suisse will continue to conduct its business in the usual way, in close collaboration with UBS. We do not expect that clients will need to take any action at this stage. The Swiss National Bank will grant Credit Suisse access to facilities that provide substantial additional liquidity.
While precise details of the transaction are still being worked through, Credit Suisse would like to stress that we do not expect there to be any disruption to client services. We are fully focused on ensuring a smooth transition and seamless experience for our valued clients and customers; and we are committed to keeping you informed in a timely fashion with any further developments relevant to you.
Thank you for your continued support.
Hmm, it’s a merger.
WHAT’S NEXT
There are real fears that a crisis in banks and confidence in the global banking system could fall. Fear that it may push the world economy into recession. Silicon Valley Bank died fast. It declared bankruptcy, despite the fact that regulatory concerns about the bank had existed for more than a year. Following the closure of New York’s Signature Bank, fears that First Republic would follow suit. This drove JPMorgan, Citigroup, and others to inject USD 30 billion in deposits to calm investor fears.
Over the course of one week, US banks borrowed a total of USD 164.8 billion from two Federal Reserve backstop facilities. This broke a record set in 2008 during the financial crisis. The age of easy money has come to an end, and everything that relied on low interest rates will likely fall as well.
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