By Pam Martens and Russ Martens: March 20, 2023 ~
Yesterday, the Swiss banking giant, UBS, agreed to a shotgun wedding with its collapsing long-time Swiss rival, Credit Suisse. Switzerland has committed $173 billion in loans and guarantees to the combined firm.
A key player in this deal was the central bank of Switzerland, the Swiss National Bank. That’s the very same central bank that had quietly bailed out UBS during the financial crisis of 2008 with the assistance of dollar swap lines from the Federal Reserve (the “Fed”) – the central bank of the U.S.
Yesterday, the Fed announced the return of those emergency dollar swap lines as the shotgun wedding of UBS and Credit Suisse failed to quell a spreading banking panic.
The way this UBS bailout went down in 2008 was illuminated in the audit of the Fed’s emergency bailout facilities from December 2007 to July 2010 that was conducted by the Government Accountability Office (GAO). The GAO audit was not released until July of 2011. It reported the following about the UBS bailout:
“In October 2008, according to Federal Reserve Board staff, the Federal Reserve Board allowed the Swiss National Bank to use dollars under its swap line agreement to provide special assistance to UBS, a large Swiss banking organization. Specifically, on October 16, 2008, the Swiss National Bank announced that it would use dollars obtained through its swap line with FRBNY [the Federal Reserve Bank of New York] to help fund an SPV [Special Purpose Vehicle] it would create to purchase up to $60 billion of illiquid assets from UBS. According to FRBNY data, from December 11, 2008, through June 2009, Swiss National Bank drew dollar amounts generally not exceeding about $13 billion to help fund this SPV that served a function similar to that of the Maiden Lane SPVs. Federal Reserve Board staff acknowledged that this was an atypical use of swap line dollars as the swap line agreements were initially designed to help foreign central banks provide dollar loans broadly to institutions facing dollar funding strains.”
The Federal Reserve Bank of New York is located at the cross street of Maiden Lane in Lower Manhattan. It created Maiden Lane SPVs I, II and III in order to create opacity around its bailout of JPMorgan’s takeover of Bear Stearns (Maiden Lane I) and its bailout of the toxic assets Wall Street had created and sold to the giant insurer, AIG, (Maiden Lanes II and III). For a closer look at the crony operations of the New York Fed, see our report: These Are the Banks that Own the New York Fed and Its Money Button.
The GAO audit located $16 trillion in cumulative loans pumped out by the Fed to bail out U.S. and foreign mega banks, many of which were derivative counterparties to banks supervised by the New York Fed. When the dollar swap lines and other Fed bailout facilities are added in, the bailout tab comes to $29 trillion as detailed by the Levy Economics Institute.
This morning, the UBS and Credit Suisse deal is looking more like a hit and run than a bank merger. Here’s a sampling of the road kill:
Swiss regulators have decided that shareholders will not get to vote on the terms of the merger, which prices Credit Suisse shares at approximately 82 cents, less than half of where Credit Suisse stock closed on Friday. The Financial Times reported yesterday that “Swiss authorities [are] poised to change the country’s laws to bypass a shareholder vote as they rush to announce a deal before Monday.” The Saudi National Bank and the Qatar Investment Authority are the two largest holders of Credit Suisse stock and are nursing deep losses this morning, as are Swiss pension funds.
Holders of $17.3 billion of a Credit Suisse convertible bond, known as AT1, will be wiped out completely, according to the Swiss regulator, FINMA. This action flips on its head the century-old concept that bondholders get priority treatment over common stock holders.
The AT1s are officially called Contingent Convertible Bonds or CoCos. This is a quarter of a trillion dollar market and these CoCos will assuredly see major upheaval in their trading prices today – delivering more losses and panic to investors.
The whole European banking sector is taking a hit in early morning trade in Europe. UBS was down over 16 percent at one point before trimming its losses. Germany’s banking behemoth, Deutsche Bank, was down more than 10 percent while France’s BNP Paribas had tanked over 8 percent. Things aren’t looking too rosy for banks here in the U.S. either. The troubled U.S. regional lender, First Republic Bank, had its credit rating downgraded further into junk status by S&P Global yesterday, despite that wily effort by Wall Street’s thundering herd last week to add $30 billion of their own money to the uninsured deposits at the bank. First Republic’s shares were down over 30 percent in New York premarket trading this morning.
Both UBS and Credit Suisse were already, individually, among the 30 Global Systemically Important Banks (G-SIBs), meaning their risk profile required closer regulatory monitoring, annual stress tests, and higher capital buffers. Individually, they posed the potential for spreading contagion. Should markets be expected to cheer that two risk threats have now morphed into one larger risk threat to financial stability?
This is akin to U.S. regulators allowing JPMorgan Chase to become riskier and more of a threat to financial stability by bulking up with the purchase of Bear Stearns and Washington Mutual in 2008.
Credit Suisse got into this predicament of a weekend shotgun marriage in no small part because of an endless stream of scandals. In the spring of 2021, Credit Suisse lost $5.5 billion from the highly-leveraged, highly concentrated stock positions it was financing via ginned-up derivatives for the family office hedge fund, Archegos Capital Management. Archegos blew up on March 25, 2021 after it defaulted on margin calls to the banks financing its trades. An internal report for the Board of Directors of Credit Suisse by the outside law firm Paul, Weiss, Rifkind, Wharton & Garrison found that Credit Suisse “was focused on maximizing short-term profits and failed to rein in and, indeed, enabled Archegos’s voracious risk-taking.”
In October of 2021 Credit Suisse paid $547 million to settle with criminal and civil authorities in the U.S. and U.K. for making an $850 million fraudulent loan in Mozambique where a significant part of the funds went for kickbacks to Credit Suisse employees and Mozambique government officials.
Credit Suisse is also embroiled in legal battles over selling billions of dollars of Greensill Capital debt to investors as low risk. Greensill filed for insolvency in March of 2021. In February, FINMA concluded a two-year investigation into the matter with a finding that Credit Suisse’s failures had constituted “a serious breach of Swiss supervisory law.”
There was also the spygate scandal. FINMA reported in October of 2021 that Credit Suisse had engaged in seven separate spying operations on its Board members, former employees and third parties. (Seriously, you can’t make this stuff up.)
Credit Suisse, unfortunately, is also interconnected via derivatives to the mega banks on Wall Street. This is highly likely why this weekend shotgun marriage came together so quickly sans a vote by shareholders. How it plays out in the long run is an entirely different matter.