UBS CS poison cabinet includes 40 billion: the details of the guarantee deal
For a long time there was nothing in writing to provide security for UBS. Now it is clear how much the bank pays the federal government for this and how big the risk for the federal government is.
UBS and the federal government have clarified the details of the CHF 9 billion loss guarantee.
Photo: Michael Buholzer (Keystone)
Almost three months after the dramatic weekend when the takeover of Credit Suisse by UBS was negotiated, there is now a written guarantee agreement from the federal government for the takeover.
So far, there has only been an oral agreement that the federal government would take on a maximum of CHF 9 billion if certain securities in Credit Suisse’s books later turned out to be loss-making for UBS. The amount is now recorded in the contract. It also states how much UBS pays the federal government for the guarantee. However, the federal government will only be obliged to pay after UBS has shouldered the first losses of 5 billion itself.
Beyond the possible loss of CHF 14 billion, there is no regulation between the federal government and UBS. This means that if the deficit is higher, the big bank has to bear it.
On Friday, the liberal Minister of Finance Karin Keller-Sutter signed the corresponding contract with UBS, according to press releases from the bank and the federal government.
Interesting details about the deal can be gleaned from the published contract. It is now clear how large the part of the Credit Suisse portfolio often referred to as the poison cabinet is. It is about securities at risk of loss that are on the books of Credit Suisse and whose value UBS cannot estimate. In other words, they entail unforeseeable risks for UBS.
Risky positions with a term of almost 100 years
The Credit Suisse securities portfolio “comprises around three percent of the total assets of the merged bank,” writes the Federal Council. “The focus is on loans, derivatives, non-strategic and structured products from Credit Suisse’s non-core business.” The three percent correspond to an investment volume of around 40 billion.
Before the takeover, UBS could only briefly look at the books of CS. She noticed positions whose value and loss potential she could not estimate. The securities in question are, for example, special loans or derivative contracts that have a maturity of almost 100 years.
The so-called “due diligence” that weekend was at most the minimum, says a person entrusted with the process. Against the background of the then smoldering small bank crisis in the USA, they wanted to play it safe.
UBS pays the federal government millions as compensation for the billions in risk
With the communication on Friday, the federal government also made it clear that for the time being it will not assume any UBS losses from the poison cabinet that exceed 14 billion. “This requires a legal basis and the approval of Parliament for a corresponding commitment credit,” it says.
After Credit Suisse had already repaid the liquidity support of CHF 100 billion at the end of May, it is clear that the federal government’s maximum loss in this matter will be less than CHF 9 billion.
The federal government also receives money from UBS for its commitment. Among other things, the bank pays a one-time contract signing fee of CHF 40 million. In addition, there is an annual maintenance fee of CHF 36 million, which is intended to cover, among other things, the federal government’s costs for external consultants. UBS is also obliged to assume all other consulting costs of the federal government and the financial market supervisory authority, “insofar as they are not covered by guarantee fees”, according to the federal government.
The potentially largest block of costs for UBS, however, consists of the so-called risk premium: This is due if the federal government actually becomes liable. It is between 0 and 4 percent of the 9 billion, i.e. a maximum of 360 million francs, and would accrue annually. The exact amount depends on how high UBS’s losses have already been and are expected to be.
UBS must report to the Confederation on a quarterly basis
In other words, this means that the lower the possible losses from the CS securities holdings, the lower the fees that UBS has to pay for the guarantee. The federal government built this mechanism in order to create incentives for UBS to achieve the lowest possible losses when realizing the investments.
Another goal is that the bank has an interest in being able to waive the guarantee as quickly as possible. UBS must also create incentives for the employees responsible to sell the positions with as little loss as possible.
At UBS, Beatriz Martin is now trying to reduce these securities holdings. The Spanish banker is responsible for the processing unit at the big bank and sits on the management board. She came to UBS more than ten years ago. At that time it was about dealing with the consequences of the financial crisis and the Adoboli scandal.
Head of the UBS settlement unit: Beatriz Martin.
Photo: ZVG
UBS must submit a quarterly report to the Confederation on the relevant securities holdings. The primary goal of the federal government is to keep the financial and legal risks for taxpayers as small as possible.
At the Swiss Economic Forum in Interlaken BE, UBS boss Sergio Ermotti said that the new major bank would follow the business model of today’s UBS. “We will hold less risk on our balance sheet, the business will be less capital intensive and we will improve the bank’s earnings potential.”
UBS will take over Credit Suisse on June 12, i.e. on Monday, as announced at the beginning of the week.
*In an original version, the papers were said to be worth 30 to 40 billion francs. It should be around 40 billion francs.
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