The awkward moment when you realize Axel “Lehmann” was the chairperson of Credit Suisse and it rings a familiar bell.
On Wednesday last week the Swiss National Bank, the Swiss regulator Finma, and the Swiss Minister of Finance not only authorized the USD 54 bn backstop but also instructed Credit Suisse to merge with UBS and the details have to be worked out before the Asian markets open after the following weekend.
Historically, Swiss regulators were against the idea of allowing two of their top two banks to merge. The government was in favor of a two-bank model irrespective of the economic conditions. During the credit crisis, the government stepped in to save UBS!
UBS was open to acquiring Credit Suisse if they get it at a decent price along with indemnification for any legal proceedings against Credit Suisse. As per news “The Financial Times reported earlier that BlackRock was working on a rival bid for Credit Suisse aiming to upstage a plan for UBS to acquire the struggling bank. The U.S. investment giant is evaluating a number of options and working with other investors, the FT added.”
UBS team offered USD 1 bn in stock with a break clause for UBS linked to the CDS spreads. One must not forget the largest stockholder of Credit Suisse was Suadi National Bank (~9.8%), they were not impressed by the offer and even tried reaching out to Deutsche Bank for a rival offer. The Swiss government threatened to block the voting rights on any deals for both UBS and Credit Suisse unless they reached a common ground. UBS sent out a revised offer of USD 3.25 bn (all stock) but they needed liquidity of up to 100 bn Swiss Franc from the government. They also wanted the government to bear the losses to the tune of 9 bn Swiss Francs after UBS bears the initial 5 bn Swiss Franc loss.
The Swiss government decided to write off the USD 17 bn AT1 (additional tier 1) bonds. These bonds were introduced during the credit crunch and designed to absorb losses when the institutions ran into trouble. Normally they are not triggered if the shareholders receive money during the takeover. This was done to please the international stakeholders who were not allowed to vote on this transaction. Middle Eastern countries still remain the biggest customers of the wealth management services for these two banks.
Independently, both banks were too big to fail. The merged entity will have a monopoly. Would it lead to anti-trust issues? Now the merger makes it a far bigger systematic risk for the country, is that a good thing?
The Enigmatic Pen 