"A rising tide floats all boats…..only when the tide goes out do you discover who’s been swimming naked." -Warren Buffett
Two of the Largest Banks in not only Switzerland, but all of Europe just merged. This is big news for investors all over the world, and perhaps a sign of significant changes to comes that could affect everyone. Including You! Here's everything you need to know and how to invest during these times
The Latest Credit Suisse News
On March 22, 2023 - UBS could be cutting as many as 15,000 investment bankers out of work as job cuts looming.
On March 19, 2023 - UBS Group AG acquired Credit Suisse for $3.25 billion (3 billion Swiss Francs), which is 30% of what the bank was worth after the markets closed on Friday (March 17, 2023).
Listen to the Official UBS Webcast
The acquisition came after the ongoing troubles at Credit Suisse including five straight money-losing quarters, a painful legacy that included billions worth of exposure to the collapsed Archegos family office, and $10 billion worth of funds tied to Greensil Capital it had to freeze. Find out more about their rocky history.
The Swiss National Bank said in a statement on Sunday (March 19, 2023) that the rescue would “secure financial stability and protect the Swiss economy.” This is also to maintain stability and avoid any panic sparked by the collapse of SVB (Silicon Valley Bank) and Signature Bank. Here's what you need to know....
- Finance Minister Karin Keller Sutter (former interpreter) orchestrated the deal.
- Shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse.
- Swiss Regulators say that the owners of $17 billion worth of “additional tier one” bonds (a riskier class of bank debt) will lose everything.
- UBS and Credit Suisse (operating for 167 years) are among the 30 most important banks in the global financial system, and have a combined asset worth of $1.7 trillion.
- Shares of UBS have climbed 15% in the past two years, and booked a profit of $7.6 billion in 2022.
- Shares of Credit Suisse have fallen 84% in the last two years, posting a loss of $7.9 billion in 2022.
- The Swiss National Bank said it would provide a loan of $108 billion (100 billion Swiss Francs) to UBS and Credit Suisse to boost liquidity.
- UBS Chief Executive Ralph Hamers will be CEO of the combined bank, and Colm Kelleher will serve as chairman.
- This sets UBS as the world’s leading wealth manager with $5 trillion of invested assets, with ambitions to grow in the Americas and Asia.
- UBS ensures that the employment of the staff of Credit Suisse will be continued.
- Saudi National Bank said "they won’t invest any more in the bank."
- UBS was bailed out by the Swiss government in 2008 due to a risky trade in US Mortgage Securities.
- Holders of Credit Suisse AT1 bonds will not be compensated.
- The acquisition was done without the consent or consent of the shareholders.
- US Treasury Secretary, Janet Yellen - “We welcome the announcements by the Swiss authorities today to support financial stability,”
- Federal Reserve Chair, Jerome Powell - “The capital and liquidity positions of the US banking system are strong, and the US financial system is resilient.”
- President of the ECB (European Central Bank), Christine Lagarde - “I welcome the swift action and the decisions taken by the Swiss authorities. They are instrumental for restoring orderly market conditions and ensuring financial stability."
- The Bank of England - it welcomed the measures taken by the Swiss authorities to support financial stability.
- Former Chairman and CEO of Goldman Sachs, Lloyd Blankfein - "While some banks have been hung up by poorly managed, concentrated risk, the overall banking system is extremely well capitalized and substantially more tightly regulated than in prior challenging times.”
- Senior Investment Strategist at Allspring Global Investments, Brian Jacobsen - "Provided markets don’t sniff out other lingering problems, I’d think this should be pretty positive"
This may not come as a surprise to many people who have been paying attention to the history of Credit Suisse as they had been losing the trust of investors and customers for many years. Credit Suisse financed Alpine railroads and Silicon Valley’s development. However, it struggled to control risk and consistently make money. Whereas others have effectively managed risk.
What could this mean for Canadian and US Investors? Well, here is a bite of the "smart money" commentary and actions:
- President of Bianco Research, Jim Bianco - “Seriously, if everyone truly believed that ‘The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient’ … Would they have to tell us? Are these words enough? Or do investors want to see Warren Buffett writing checks to regional banks in the next two hours (before Asia opens)?”
- The CEO of Berkshire Hathaway, Warren Buffett had been talking to President Joe Biden’s administration in recent days over possible investments in the battered regional bank sector, and offering his advice.
- Tao of Trading Options Academy School Founder, Simon Ree - “I don’t think there are any direct consequences for U.S. investors, but it’s extremely negative for sentiment if a major Swiss bank fails, hot on the heels of SVB/SBNY. The market will be (temporarily) wondering who’s next. It could start to have the optics of a global banking crisis, rather than an idiosyncratic failure of a niche U.S. regional bank”.
With all this being said, we could be finding out on (as Warren Buffett puts it) "who’s been swimming naked" as the tide goes out in the form of inflation and interest rates on the rise. There could be more skeletons in the closet yet to be revealed.
Switzerland currently manages $2.6 trillion in international assets, making it the world's largest financial centre ahead of Britain and the United States. However, countries such as Luxembourg and Singapore, which has grown rapidly in recent years, are knocking at the door.
While politicans and regulators seem to be putting on a brave face, it seems as though the once looked up upon Swiss banking empire could be losing its reputation. Especially with the takeover going along without the approval of shareholders.
The ECB recently raised their interest rates and First Republic Bank is looking for rescue lending from large banks, what more could come? Stay tuned to find out.
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Credit Suisse's Rocky History
Summer of 1990
Chief Executive Officer at the time Rainer Gut took control of the Swiss bank’s US partner, First Boston to inject capital and backstop bad loans. First Boston got into the high-yield debt markets during the 1980s and loaned out billions to fund risky buyout transactions.
The industry had imploded, and the $457 million loan for the leveraged buyout of Ohio Mattress Co. was very problematic. The failed financing would go down in Wall Street infamy as “the burning bed." Credit Suisse embraced the same types of risky business, such as leveraged finance and mortgage-bond trading leading to the "Burning Bed" deal. in 2006, First Boston was dropped by CS.
This sparked an aggressive acquisition of Swiss rivals, which increased the complexity. After succeeding Gut as CEO, Lukas Muehlemann bought Donaldson, Lufkin & Jenrette Inc. in 2000, but the deal turned out to be an expensive misstep, as several of the firm's top-producing bankers left for rivals.
The Swiss bank then acquired Winterthur Insurance Co. in 1997. Winterthur was then sold in 2006 by a new CEO Oswald Gruebel alongside John Mack. Frequent management changes created strategic turmoil at the top, while adding pressure down the ladder to generate returns.
2015
In the aftermath of the market turmoil of 2008, Patrice Lescaudron began dipping into a client’s account in order to win back the losses for other customers.
The actions were clearly visible and documented. Despite the red flags by supervisors in 2008, 2011 and twice in 2013 for breaching compliance policies. Credit Suisse did nothing, he was convicted of fraud in 2018 and took his own life in 2020.
January 2019
A long running feud between CEO Tidjane Thiam and Iqbal Khan, Khan ran wealth management and intended on leading Credit Suisse. Khan broke out into the open at a dinner in a wealthy suburb on Lake Zurich.
To no surprise, Khan was passed over for promotion and then quit in July. He later accepted a job at UBS, which caused concern in Credit Suisse’s top ranks (chances of poaching key personnel). A private security firm was hired by Thiam to monitor Khan's activities which was eventually discovered by Khan and met with physical altercations. Thiam was then forced out in February 2020. The Swiss banking regulator in October 2021 uncovered five additional cases of surveillance from 2016 to 2019.
Investing in the Financial Markets involves Risk and the Potential to Lose Your Entire Investment will Always Exist. Only Invest with Money You Can Afford to Lose.
Do You Think Switzerland Will Rebound? Is This Just the Beginning? Who's Next?
Let Me Know In The Comments Below
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