This Monday the financial world woke up to a new European colossus that brings together the two main Swiss banks. It is the result of the acquisition by UBS, the largest and most sound, of the second entity, a Credit Suisse in a desperate situation, which threatened to unleash a financial storm of the first order. This was announced yesterday by the president of UBS, Colm Kelleher, during the press conference in which the acquisition was announced for 3.25 billion dollars.
The announcement was made late on Sunday in the hope that, at the opening of the Tokyo market, the earliest of the financial markets, the stability lost during the past week would be recovered and the risk of systemic contagion would be curbed had triggered the outflow of capital from Credit Suisse last week.
“The situation is well known, Credit Suisse is one of the 30 global systemic banks. It is one of the two main banks in the country. Therefore, it is not only decisive for Switzerland, for our companies, for private clients, for their own workers, but also for the stability of the entire financial system. On Friday we found that the outflow of funds was uncontrollable”. With these words yesterday the president of the Swiss Confederation, Alain Berset, justified the operation that his Government launched last week to save Swiss, European and global banking.
Efforts throughout the weekend have been focused on preventing it from being a public rescue. “It’s not a rescue”, the Swiss authorities and the managers of the two banks who appeared before the press insisted again and again yesterday. “This is a commercial solution.” The difference is very important, as it assumes that the rules on liquidations that apply to too-big-to-fail banks are not triggered, and therefore Credit Suisse’s Tier 1 bonds that may be spread out are not liquidated throughout the global financial system.
In return, the Swiss Government grants guarantees worth 9 billion Swiss francs to compensate for future losses. This guarantee will be activated in the event of losses in the Credit Suisse portfolio. In this case, UBS would assume the first 5,000 million francs in losses, and the Federal Government, the next 9,000 million. In addition, the agreement foresees that the Swiss National Bank will make available to UBS a liquidity line of 100,000 million francs.
On the other hand, UBS avoids the usual rules of the financial system whereby the merger of two entities must be approved by the board of directors. “We had to close the operation as soon as possible. There was no more margin”, justified the bank’s directive last night.
Vincent Kaufmann, chief executive of the Ethos Foundation, which represents Swiss pension funds that own between 3% and 5% of Credit Suisse and UBS, told the Financial Times that the move to bypass a shareholder vote on the ‘operation constituted bad corporate governance.’ I can’t believe that our members and UBS shareholders are happy about this. I had never seen measures taken like this, it shows how bad the situation is”, the British newspaper reported.
To calm spirits, authorities assured that UBS’s current chief executive, Ralph Hamers, and its chairman, Colm Kelleher, will remain at the helm of the combined bank. “We continue to manage all of Credit Suisse’s assets as we do with our clients,” assured Colm Kelleher with a circumspect face.
There were over reasons. As the Financial Times reported throughout the weekend, UBS’s last intention was to buy a bank with the characteristics of its historic rival. Not only because UBS’s plans were to grow in the United States and Asia, but because one of Credit Suisse’s strengths is investment banking, in which UBS does not have much experience.
In fact, the acquisition of this division has been one of the main hurdles in the talks against the clock that have been held throughout the weekend between the boards of directors of the two banks, the financial regulator and the Swiss Government. As it was learned yesterday, the financial authorities of the United States and Britain were also involved “for fear that the bankruptcy of Credit Suisse would trigger a global financial meltdown”.
UBS’s reluctance centered from the outset on the doubts generated by Credit Suisse’s balance sheet, due to its financial and management problems over the past few years, and the possible losses that may arise especially in its extensive banking business investment In fact, Kelleher himself explained yesterday that UBS will maintain the national business of Credit Suisse, but that the intention is to end the management of the investment bank, although “it is still too early to be specific”.
On Sunday morning, UBS presented a bid for its rival for $1 billion that was not accepted by Credit Suisse’s board of directors. But the clock was running against the buyer. Achieving a solution before the opening of the Tokyo Stock Exchange was key for the financial system. UBS was the only option. The investment fund Black Rock and the German bank Deutsche Bank had been evaluating its possibilities, but there was no time. Only a Swiss entity could have all the relevant authorizations to close the operation on time.
