One of the biggest focuses of worry has been UBS, which is highly levered even by investment banking standards, a major derivatives player, and widely seen as too big for the Swiss government to rescue.
The measures announced before the opening of the market in Europe are clearly hopes to put doubts about the Swiss giant to rest. But will they be sufficient? From the Wall Street Journal:
Swiss banking giant UBS AG (UBS) said Thursday it will raise CHF6 billion of new capital through mandatory convertible notes, fully placed with Swiss Confederation
The Swiss National Bank (SNB) and UBS have reached an agreement to transfer up to USD 60 billion of currently illiquid securities and other assets from UBS’s balance sheet to a separate fund entity.
With this transaction, UBS caps future potential losses from these assets, secures their long-term funding, reduces its risk-weighted assets, and materially de-risks and reduces its balance sheet.
This transaction allows the SNB and shareholders of UBS to participate in the recovery potential of the entity’s assets once the loan is fully repaid.
The solution significantly reduces the uncertainty for UBS shareholders and clients and contributes to the stability of the financial system by ensuring an orderly sale of these assets.
The fund will be capitalized with up to USD 6 billion of equity capital provided by UBS and a non-recourse loan in the maximum amount of USD 54 billion provided to the fund by the SNB. The entity will be controlled by the SNB. UBS will sell its equity interests to SNB for USD 1 and will have an option to repurchase the equity once the loan is fully repaid for a purchase price of USD 1 billion plus half of the equity value exceeding USD 1 billion.
To fund its equity contribution, and at the same time maintain its strong capital position, UBS can raise CHF6 billion of new capital in the form of mandatory convertible notes (MCN). The MCN has been fully placed with the Swiss Confederation.
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It’s a game of hot potato:
U.S. hedge funds urged the Bank of England to step in and free the $65 billion of Lehman Brothers Holdings Inc. assets frozen in London, the Financial Times reported, citing a letter from Richard Baker, the chief executive officer of the U.S. Managed Funds Association.
It says the Swiss are getting the $54B loan from the Fed. Won’t this hit the Fed’s balance sheet?
How the heck does this work?
Doesn’t it say the 54B comes from SNB?
This transaction allows the SNB and shareholders of UBS to participate in the recovery potential of the entity’s assets once the loan is fully repaid.
That’s pretty funny. How generous of UBS. You’d think that if the ‘recovery potential’ of the assets was all that high, UBS would want to ‘participate’ in that all by themselves.
Currency swap because the “assets” are USD based. Wonder if it’s a gunny sac filled with toxic GSE paper.
Hope the Chinese are paying attention to this. If they wanna eat, they better get to the table. However, in that transaction, no need for a Currency swap cause those toxins are for export. The chickens coming home to roost!
Long time since I traded FX, but did the FED just take on CHF/USD risk to the tune of some $60 billion?
Funny also how neither the WSJ nor the NYT articles mentions this curious little detail.
It’s a huge, huge, deal – 13% of Swiss GDP. All the same, it’s grossly inadequate for UBS – it only covers US mortgages. I’m sure UBS has lots of other bad loans coming up. In spite of its huge size, it’s really only window dressing. Of course, the current game is all about confidence, so perhaps it will be enough.
It’s a debt-deflationary scenario. Which again will bring out comparison to the Great Depression.
From analysts at JPM this morning (highlights ours):
Our 29 selected Euro. banks are at 3.75% equity/asset ratio based on IFRS account. Reaching an eq./asset ratio of 4.5% would require €5.8tn of asset reductions. In total we estimate potential for reductions of €1.2tn from repos, €2.7tn from trading assets, €0.5tn of loan reductions and the balance of €1.5tn needed to come from other assets. The banks most exposed in our view are DB, UBS and BARC looking at current eq/asset ratio and the b/s maturity profile.
Those are figures against which all the Tarps in the world cannot protect the real economy.
As Citi’s European banking analysts said in a note on Wednesday:
If it feels like we are living through history at the moment, it’s probably because we are.
http://ftalphaville.ft.com/blog/2008/10/16/17114/the-swiss-tarp-and-the-e58-trillion-delever/
And remember BARC has $2.4 trillion CDS positions too. Tim
UBS is mopping up a lot of Lehman clients.
Something I don’t get. Can anyone explain? If UBS is, indeed, as Yves says, “widely seen as too big for the Swiss government to rescue,” and this is being described as a “rescue”, exactly who is doing the rescuing? It couldn’t be the Fed, because its donation of $54 billion is chump change compared to the Swiss economy. It’s not the Swiss, because everyone says they can’t afford it. And I see that Schwarzenegger is putting his money into California bonds. So who else is left?