The Credit Suisse Bailout

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Get an exclusive look at the Credit Suisse bailout and uncover the details about who truly benefited from the emergency measures. Over the weekend, we witnessed the sale of Credit Suisse to UBS, which was likely the most sensational moment in the global banking industry since the financial crisis of 2007-2008. As we recently discussed in our bulletin, Credit Suisse has long been the problematic child of European banking, enduring a series of scandals, losses, management upheavals, and restructuring initiatives. The bank has been embroiled in every scandal of the past decade, consistently hemorrhaging money. Consequently, even as Swiss regulators reassured the markets that all was well at Credit Suisse, they simultaneously signaled to the bank that the game was up. Global markets were on edge last week as three US banks had just failed, and wealthy clients were pulling more than ten billion dollars out of Credit Suisse each day. This, coupled with the substantial client withdrawals that occurred in the final quarter of 2022 after rumors spread on social media in October that the bank was on the verge of bankruptcy, contributed to the mounting tension. On Wednesday, Swiss regulators summoned Colm Kelleher, the UBS Chairman, to come up with a plan to rescue Credit Suisse. The regulators and UBS were both opposed to the option of a government-controlled wind-down, as it posed the risk of contagion and further harm to the reputation of Swiss banks globally. Despite discussions about a merger between Switzerland’s two largest banks, anti-trust regulations had been a major obstacle. However, it was believed that the regulators were committed to a two-bank model until last Wednesday. During the credit crunch, the Swiss government had bailed out UBS with taxpayer money to prevent an acquisition. News reports suggest that there was almost no direct communication between the two banks during the negotiations. UBS made it clear that they would only participate in the deal if it was inexpensive and if they were protected from any legal issues that Credit Suisse may face. By Friday, customer withdrawals from Credit Suisse were increasing, and international banks were severing ties with the firm. The regulators concluded that without a deal over the weekend, the bank was unlikely to open on Monday. BlackRock sent a team to Zurich to discuss various options, but the deals they proposed were unappealing to the Swiss regulators. A Chinese blockchain entrepreneur tweeted his interest in buying Credit Suisse and transforming it into a crypto-friendly bank, but there was no formal response from the Swiss regulators. Late on Saturday, after a day of negotiations between UBS and the regulators, UBS proposed a document offering $1 billion dollars in stock for the entire group. The deal included a break clause linked to credit default swap spreads, which would likely have killed the deal once announced. Credit Suisse rejected the offer, and their Middle Eastern investors were furious. The Swiss government threatened to remove the Credit Suisse board if they could not strike a deal and announced emergency legislation to strip the shareholders of both banks of their voting rights on any deal due to the complexity of the transaction and the short timeframe. No alternative was found.

New York (RichTVX.com) —

The regulators urged UBS to raise their price, creating pressure on both parties. UBS responded with an offer of $3.25 billion in stock but demanded more government support, including a 100 billion Swiss Franc liquidity line from the Swiss National Bank and a government loss guarantee of up to 9 billion Swiss Francs, after UBS had suffered the first 5 billion Swiss franc loss itself. With time running out, the Credit Suisse team was still outraged by the unfolding situation. Despite their offices facing each other across a square in Zurich, both parties had yet to sit down together. The Swiss government made one final adjustment to the deal to make it more appealing to Swiss citizens and the bank’s equity investors. They decided to impose losses of just over $17 billion dollars on Credit Suisse’s additional tier 1 (AT1) capital bonds. These bonds were introduced in the aftermath of the Credit Crunch and are designed to absorb losses when financial institutions face difficulties. Normally, they are not activated if shareholders receive money as part of a takeover, but the bond contract in this case specifically states that a write-down may occur even if existing preference shares, participation certificates, and ordinary shares of Credit Suisse Group remain outstanding. These bonds ultimately became worthless. The fact that this provision was included in the bond contract allowed Swiss authorities to ignore the normal order of priority, likely done to save face with international equity holders after denying them a vote on the transaction. This is particularly relevant for investors from the Middle East, which is an important customer base for both banks’ wealth management operations. Credit Suisse’s board reviewed the final contract and, after consulting with their advisors, agreed to the deal. A press conference was quickly organized. “This is not a bailout,” the Swiss finance minister said, “This is a commercial solution.” She continued, “The failure of a systemically relevant bank would have had severe repercussions, and Switzerland needs to be aware of its responsibility beyond its own borders.” Axel Lehmann, the chair of Credit Suisse, stated that “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome.” Stay tuned for part 2.

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