Hidden dynamics of Credit Suisse UBS deal explained | Role of Swiss Govt in UBS buying Credit Suisse

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Credit Suisse will soon be taken over by UBS. Any big acquisition takes 5-6 months to formalize but this acquisition took place within 48 hours. Why? Because of the intervention and mediation by the Swiss Government. In this video, I talked about what happened before the acquisition of Credit Suisse, the mechanics of the Credit Suisse UBS deal, and what takeaways we can draw from this deal.

Swiss regulator Finma said that Credit Suisse could’ve become illiquid even if not solvent. Two words to focus on here are liquidity and solvency. To understand this I’ve used the following analogy. If there are 1000 customers depositing 10 lakhs each in HDFC bank then HDFC would have a total deposit of 100 Cr. This 100 Cr. HDFC will used to give out loans but since some of the depositors may come back to ask for their money,

HDFC would have to keep about 10 lakhs with itself, and the remaining 90 Cr. will be used for loans. Now if one customer comes back to ask HDFC to return their entire money then HDFC will be able to do it. But if more and more customers come to ask HDFC to give back their deposits, HDFC will not be able to do that. This short-term problem would be considered a liquidity crunch and HDFC would be considered illiquid. In the long run, if HDFC is not able to pay back the customers, then it is called a solvency issue. The inability to pay back in the short run is called Illiquidity and the inability to pay in the long run is called insolvency.

The Swiss government’s thought process was that Credit Suisse is going through a liquidity issue. It has given out loans and made investments so it would not be able to pay back all the customers if they were to come back. Over $10 Billion was withdrawn from Credit Suisse daily for 5 days. This means a total liquidity crunch of over $50 Billion. Because of this, the Swiss Government had to intervene. What were the options with the Swiss Government? They could’ve let customers keep withdrawing deposits from Credit Suisse until Credit Suisse declared a liquidity crisis. So, then the Swiss Government would have given a bailout to the bank - buying some of its shares, injecting some liquidity, and so on.

Such a bailout would’ve been bad in the current economic situation. It would have sent negative signals around the world. The second option in front of the Swiss Government was to acquire Credit Suisse and nationalize it. The problem with that was that in a capitalistic society, you don’t want to convert a private profit-making bank into a government institution. Credit Suisse isn’t even profit-making - it is a loss-making company to support which the taxpayer’s money would’ve to be spent. Not a popular option. Banks make money through risky investments. The government couldn’t do that because if the investments failed after nationalizing Credit Suisse, then it would have to be supported by the taxpayer’s money.

The third option was to find a buyer who could absorb Credit Suisse. UBS is the biggest bank in the Swiss Banking system which is why it could absorb Credit Suisse. This is why the Swiss Government proposed UBS to buy Credit Suisse. But UBS was initially reluctant because Credit Suisse is a loss-making company, and secondly Credit Suisse and UBS are not strategically aligned.

The Swiss Government declared that they will be supporting Credit Suisse on multiple levels. $3.2 Billion deal means that every shareholder of Credit Suisse will get about 0.76 swiss francs per share which is a drop from the initial share price of 1.86 swiss francs which amounts to 60%. The Govt and UBS have released a joint statement in which they have stated that the Additional Tier 1 bonds with $17 Billion from Credit Suisse will be deemed worth 0. So the shareholders have lost 60% of their money and Bond Holders have lost 100% of their money. At the end of the video, I’ve shared takeaways we can draw from this entire scenario.

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Chapters

0:00 - Intro
1:00 - Pointers
1:15 - Illiquidity & Insolvency
3:15 - Swiss Gov’s thought process
3:49 - Options Swiss Gov Had
9:00 - Credit Suisse UBS deal dynamics
9:54 - Takeaways
12:20 - Use of AI
13:17 - Outro