In a high-stakes race for yet another emergency bank bailout, before the opening of the markets in Asia, the Bank of England, the Federal Reserve and financial regulators in the U.K. and the U.S., worked feverishly with the Swiss National Bank and Swiss financial regulators to avert a banking meltdown on March 20. Barely hours before the Tokyo market opened, in Zurich’s early evening on March 19, a deal was announced to attempt to keep Credit Suisse from triggering a worldwide collapse of the web of financial derivative contracts. The elements are:
Union Bank of Switzerland (UBS) is to buy up Credit Suisse (CS) for somewhat over $2 billion. UBS gets a loan from the government for $54 billion. (Yes, UBS spends less than 4% of the loan extended to them to “buy” CS.) CS gets a loan for $162 billion (on top of the then “historic” $54 billion loan that was gobbled up only a week ago). UBS is freed from having to cover the first $9.6 billion or so of expected losses of their newly-acquired CS on Monday—or, not if, but when they hit. One is not to probe too deeply as to where the Swiss government comes with last week’s $54 billion, much less today’s $225.6 billion.
Of course, the rejection by CS’s shareholders of the arrangement would be automatic, as the $8 billion valuation of CS at the close of the market, about 50 hours earlier, was now about one-fourth that—cutting out about 75% of those folks’ investments. That was neatly solved by changing the rules in Switzerland in the blink of an eye, and disallowing any vote. Why have a vote when it won’t go your way?