takeover completed
Credit Suisse is history – its billion-dollar risks remain
By Max Borowski
6/12/2023, 4:42 p.m
Almost three months after the announcement of the hectic decision to take over the long-established bank Credit Suisse by its long-time rival UBS, the time has come: the merger into the Swiss mega-bank has been completed, and the almost 170-year history of Credit Suisse as one of the leading financial institutions in the world Switzerland is coming to an end. “Today we are reaching an important milestone,” says a UBS letter published by several newspapers: “We have completed the legal process of acquiring Credit Suisse.” However, the Credit Suisse problem is far from over. Neither for the management of the new bank, nor for the Swiss government and authorities and, in the worst case, not for the taxpayers either.
With this deal, UBS has not only become a banking giant with 120,000 employees and total assets of around 1.6 trillion US dollars become – about twice as much as the annual economic output of Switzerland. The new giant also lives on with some of the financial risks and legacy that brought down the now-ex-Credit Suisse and could be a major headache for UBS and Switzerland in the future. An overview:
17 billion from mandatory convertible bonds:
As part of the government-engineered takeover of Credit Suisse, the financial regulator ordered $17 billion in bonds from the bank to be added to equity. That is, the creditors lost all the money, the bank’s debt was erased, and equity increased by the corresponding amount. Not surprisingly, the holders of these bonds do not want to put up with this and have filed lawsuits against the Swiss government in Switzerland and the USA. It is true that these are special mandatory convertible bonds: their purpose is to help banks meet capital requirements. They are intended to form a capital buffer that can be used instead of taxpayer money in the event of a crisis if a bank has to be rescued by the state. However, in the case of Credit Suisse, the chances of investors getting the billions back by court judgment are not bad. When the takeover deal was announced in March, the Finance Minister herself expressly emphasized that it was not a matter of a state rescue, but of a “private-sector solution” between Credit Suisse and UBS.
$400 million canceled bonuses:
Not only the holders of the mandatory convertible bonds but also employees of Credit Suisse have sued against the conversion of the mandatory convertible bonds. Some of their contracts stipulated that they would not receive any bonuses if the bank had to draw on the bonds. According to reports, a total of $400 million in bonuses for Credit Suisse executives have been removed for this reason. It is unclear whether the state or the bank would have to pay the bonuses if the employees were successful with their lawsuit.
Nine Billion Loss Guarantee:
In the course of the takeover, UBS obtained a partial state guarantee for possible losses for part of the Credit Suisse portfolio. This agreement applies to financial derivatives, some loans and so-called structured products, i.e. for some very risky papers in the amount of 44 billion dollars. UBS would initially have to bear five billion dollars from possible losses from this portfolio. For losses beyond that, the Swiss government would pay up to nine billion euros. It remains unclear what would happen in the event of even higher losses, which cannot be ruled out, at least in theory.
Legacy litigation and restructuring costs:
UBS is not even aware of any of the risks that could be slumbering on Credit Suisse’s books. Because only with the completion of the takeover does she really have full insight. According to one study, the cost of settling Credit Suisse litigation could range from $3 billion to $5 billion, about three times more than the bank has previously set aside. Vontobel analyst Andreas Venditti also expects restructuring costs of eight to ten billion dollars and losses in connection with the evaporation of CS business areas of five to ten billion dollars.
100 billion repaid:
However, there is not only bad news from Credit Suisse: 110 billion francs, which the Swiss state had temporarily made available to the ailing bank as liquidity aid, have already been repaid. The money was intended to ensure the payout of clients who withdrew en masse in the months leading up to the UBS acquisition announcement. Credit Suisse had sufficient assets for this, but not always sufficient liquidity. The liquidity support should bridge bottlenecks. In addition to the money borrowed, Credit Suisse paid 110 million francs in interest and fees. So far, the state has not only lost any money in the rescue operation, it has even made money from it. There is no guarantee that this will remain the case. However: In 2008, during the global financial crisis, the state had to save UBS from collapsing. The central bank completed this process years later with a profit in the billions.