🇨🇭🏦 UBS's Credit Suisse Takeover: Everything You Need to Know
Happy Wednesday all,
The Federal Reserve just raised interest rates again. Now we’re up to a range between 4.75% to 5%. That should affect all of our loan rates as well as high interest-bearing accounts. I’m working with a few companies to try to get the Hump Days community a promotional rate or bonus when you sign up for a high yield savings - so stay tuned for that in a future newsletter.
In YouTube channel news, you should start seeing the new studio set in future videos (starting next Weds/Thursday) and I’ve decided to start going deeper into video research and filming - which hopefully means better content for you all.
One thing I struggle with is trying to be everywhere all at once (Instagram, Tik Tok, Facebook, YouTube, Twitter, etc), and I think for mental sanity I may just have to settle on one or two platforms in the future. Still thinking about what that looks like.
I hope you are having a good week, today’s edition has a lot of great info including what happened to UBS over the weekend.
- Humphrey, Rickie & Tim
Tweet of the Week
The Weekly Brief
Biden Vetoes Republican Effort to Overturn Socially Conscious Retirement Rule (The Guardian)
Biden rejected legislation that would have overturned a Labor Department rule protecting pension funds that invest based on environmental, social, and governance factors (ESG), marking the first use of his veto power. As it stands, the rule protects investment managers from lawsuits if their choice to invest in ESG causes yield lower returns. Republicans argue that it prioritizes allocating money based on liberal political causes instead of earning the best returns for retirement accounts.
Why Does it Matter?
I don't know about this. I get why he veto'ed it but there's a lot of talk lately about how ESG investing isn't always socially conscious. Politics aside, if you are investing into ESG funds - look into the companies they are actually investing in and see if that aligns with your values.
U.S. Studies Ways to Insure All Bank Deposits if Crisis Grows (Bloomberg)
Treasury Department staff are reviewing whether federal regulators have the ability to temporarily insure deposits greater than the current $250,000 cap without formal consent from a deeply divided Congress. The move is not seen as necessary after regulators helped banks keep up with withdrawals but they are developing a strategy in case the situation worsens.
Why Does it Matter?
With the internet and group-chats so ubiquitous these days... bank runs might happen more often than previously anticipated. Also, the $250,000 cap has been in effect since 2010, but has historically shown to increase every decade or two. Good for Treasury to have a contingency plan.
Home Sales Spike 14.5% in Feb, Median Price Drops for First Time Since 2012 (CNBC)
Higher mortgage rates have been cooling home prices and for the first time since 2012, prices came in lower on a year-over-year basis. The median price of an existing home sold in February was $363,000 representing a 0.2% decline from February 2022. The lower median price reading may be a sign that more affordable homes are selling. Real estate experts are seeing stronger sales gains in areas where home prices are decreasing and the local economies are adding jobs.
Why Does it Matter?
Sales may have been even higher if it were not for low supply but with mortgage rates still at an elevated level, the likelihood that home prices heat up again is not looking very likely.
You’ll Find This Interesting
Last month, a couple got married in the Metaverse… and it was sponsored by Taco Bell. The reason for the couple choosing to move forward with a Metaverse wedding? They wanted to do something different and Taco Bell was willing to foot the bill to pay for the avatars and the production.
Hump Days Scoop
Over the weekend, UBS (formerly the Union Bank of Switzerland), agreed to an emergency rescue of its rival Credit Suisse in an attempt to quell any financial market panic by the failure of two American banks earlier this month. These are the two largest banks in Switzerland and their stability is crucial to the broader stability of global markets as a whole. A merger between the two largest Swiss banks may have seemed like an impossibly monopolistic pairing in years prior but Swiss authorities granted UBS a waiver to carry on with the $3B acquisition (60% less than what the bank was worth when markets closed on Friday).
But why did one have to acquire the other? What led to this and where do we go from here?
Why is UBS coming to the rescue of Credit Suisse?
Both UBS and Credit Suisse are in a unique class of banks deemed “systemically important” by the Financial Stability Board. In other words, the two Swiss banks are part of a group of 28 other banks that are “too big to fail”. As a result of their unique status, regulators pushed the two into the biggest banking deal in years to halt the potentially catastrophic decline in confidence in the global banking system.
The Swiss government even said they would provide more than $9B to backstop losses that UBS would incur because of the acquisition and the Swiss National Bank provided more than $100 in liquidity to facilitate the deal.
Regulators were worried that Credit Suisse’s failure would make Switzerland a new source of contagion for global stress. The collapse of SVB stirred urgency in regulators to make the deal happen before Asian markets opened for the week, with Credit Suisse Chairman Lehmann saying that “the acceleration of the loss of trust has made it clear that Credit Suisse cannot continue to exist in its current form.”
While the deal is attractive for UBS shareholders, chairman Kelleher wanted to make it clear that “as far as Credit Suisse is concerned, this is an emergency rescue,” and that “[the deal] is absolutely essential to the financial structure of Switzerland and to global finance.”
UBS now owns Credit Suisse’s cache of rich wealth-management clients in Asia and can transition them to their WM arm. However, along with Credit Suisse’s attractive WM clients, comes its investment bank which is an ugly spot in its operations and was something the institution was in the process of winding down.
What led to Credit Suisse’s demise?
Credit Suisse has had issues for years now, many self-inflicted including laundering money for the Yakuza, breaching U.S. sanctions, corporate espionage, and most notably the failure of two key clients in 2021, Greensill Capital and Bill Hwang’s Archegos Capital Management.
Scandals aside, Credit Suisse had a reputation on Wall St. for living dangerously. Its liberal risk management led to it emerging from the 2008 credit crisis in better shape than its rivals, leading them to pour more money into its freewheeling investment bank instead of pivoting into more stable lines of business. However, in the years since 2008, Credit Suisse struggled to compete with Goldman Sachs and JPMorgan which had bigger balance sheets and better access to American capital markets.
The collapse of Silicon Valley Bank last week added to the negative impact of the revelation of significant weaknesses in Credit Suisse’s financial reporting. Next, news came out that Credit Suisse’s largest shareholder would not be injecting new funds and investors and clients subsequently withdrew tens of billions of dollars in funds last week.
How were Credit Suisse shareholders impacted?
Credit Suisse shareholders will receive 1 share in UBS for every 22.48 shares they owned effectively wiping them out. The deal has equity holders receiving the equivalent of 0.76 Swiss francs for shares that were worth 1.86 francs on Friday.
Interestingly enough, the deal has one section of Credit Suisse bondholders seeing the value of their bonds become worthless. This is unusual because one of the first things you learn in a business degree is that in the event of bankruptcy, bondholders get paid first. These AT1 bonds or “additional tier 1” bonds are a type of debt that can be converted into equity and were created in the aftermath of the financial crisis as a way of shifting risk away from taxpayers in crisis situations. These bonds often have higher yields than other bonds but also exist to absorb losses, which in the case of Credit Suisse, is exactly what they were used for.
Where do we go from here?
Global financial leaders have rushed out the gate to reassure the public that our financial system is secure. The Swiss National Bank said the rescue deal for Credit Suisse was the best way to restore confidence in the markets and experts are not forecasting a repeat of 2008 where the failure of a number of big banks was the catalyst for a global recession.
The Bank of England, Bank of Japan, Bank of Canada, the European Central Bank, U.S. Federal Reserve, and the Swiss National Bank announced they would boost the flow of USD through the global financial system to ease strains in global markets and take pressure off banks.
UBS plans to downsize Credit Suisse’s investment banking business and “align it with [UBS’s] conservative risk culture,” said Chairman Kelleher.
It appears that the move, done as swiftly as it was, was successful in stabilizing global markets. For now.