When UBS Group agreed to buy Credit Suisse for close to $3.2 billion, thereby also agreeing to eat up some of its losses, Swiss Finance Minister Karin Keller-Sutter was quick to clarify that the deal was ‘not a bailout’, but the ‘best possible solution’ given the adverse circumstances. Having brokered the deal under a tight deadline over the weekend, the Swiss government was determined to not face the infamy of bailing out a systemically important bank at the global level. After what went down during the 2008 global financial crisis, admitting to a bank bailout would be equivalent to confessing that some banks are just too big to fail, and that taxpayers have an obligation to save private banks when faced with crises.
However, soon after the historic banking deal became public, some leading commentators were quick to label the UBS takeover of Credit Suisse as nothing but a bailout, an indication that some important lessons were not learned post-2008. Top economist Mohamed El-Erian was one such voice. El-Erian, the chief economic advisor to Allianz and also the president of Queens' College at Cambridge University, told Bloomberg, “The phrase 'bailout' has become such an awful phrase that everybody is avoiding it. They're going out of their way to say that it's not a bailout, but then they can't explain why money's being put to work.”
He was referring to the various liquidity measures that were added to the deal from the Swiss government’s end. He said it’s “a private sector solution, but has government intervention”. As part of the agreement between UBS and the crisis-hit Credit Suisse, Swiss National Bank (SNB), Switzerland’s central bank, agreed to help UBS with loans worth $108 billion as liquidity assistance in order to prevent the takeover from having adverse impacts on the broader financial system. In addition to this, the Swiss authorities also agreed to ‘absorb’ some of the losses that UBS will have to incur from the deal.
As far as the official narrative goes, the deal between UBS and Credit Suisse is simply a merger, two private entities engaging in a partnership that holds benefits for both the parties. Interestingly, neither of the two banks sought approval from its shareholders before agreeing to the deal brokered by the government.
In a statement issued by Credit Suisse, the disaster-struck lender said, “The SNB will grant Credit Suisse access to facilities that provide substantial additional liquidity. On March 19, 2023, Swiss Federal Department of Finance, the Swiss National Bank and FINMA have asked Credit Suisse and UBS to enter into the merger agreement. Pursuant to the emergency ordinance which is being issued by the Swiss Federal Council, the merger can be implemented without approval of the shareholders.”
When two leading global banking firms reach an agreement of acquisition in rushed meetings over a weekend, it stands apart from how an important merger usually takes shape. What is more striking is that the acquirer in this deal was part of a government-led bailout during the 2008 crisis as well.
Ghost Of The 2008 Banking Disaster
In 2008, after the collapse of the Lehman Brothers, UBS was the holder of numerous illiquid securities and was faced with a liquidity crunch. Being the world’s largest asset manager, UBS was in dire need of cleaning up its balance sheet that was filled with junk assets. The Swiss government and its central bank had to step in help their country’s biggest private lender. The state provided UBS with $6 billion worth of emergency liquidity and the central bank helped create a stability fund that will take care of UBS’ junk assets.
A special purpose vehicle worth $60 billion was created with $54 billion coming from SNB and the rest from UBS’ equity capital. This special fund, set up in the Cayman Islands by SNB, was where UBS could park its junk assets without it showing up in the lenders’ balance sheet. The Swiss government at that time felt that such a drastic step was necessary because the collapse of UBS would have reportedly impacted the savings of over a million private customers and current accounts of 300,000 companies, largely small and medium enterprises.
The Swiss government issued a statement back then claiming that the “package of measures will contribute to the lasting strengthening of the Swiss financial system”. The public, however, was sceptical of the strategy meted out by the government using its taxpayer money. Trade unions in the country gave calls for protest against the bailout, attracting thousands in the ensuing protest rallies. At one such incident, protestors held a placard bearing a new meaning for the bailed-out bank’s acronym: Union des Bandits Suisses (Union of Swiss Bandits).
Credit Suisse, too, needed emergency funds to save itself from the 2008 crisis. In its case though, it was a slew of private investors that had to step in, and not the Swiss government or its central bank.
Lessons To Learn, Unlearn and Relearn
In the aftermath of the 2008 crisis, governments around the world introduced fresh regulatory measures in its banking system to ensure that a similar tragedy never takes place again. The financial world realised that in an increasingly globalised system, a slip up in the banking sector of a single country can have vast repercussions in countries all over the world. One important lesson, that was supposedly learned, was that governments stepping in to help too-big-to-fail private banks is not a favourable situation.
Yet, Switzerland finds itself there again, although it is not to be called a bailout programme this time. The Alpine country, famous for its safe and secure banking system, simply helped broker a deal between its two largest banks. This helping measure happened to involve over a $100 billion of public money and will subsequently create a merged entity out of two Global Systemically Important Banks (G-SIBs). This new entity will bigger than just UBS, bigger than just Credit Suisse, and bigger than many too-big-to-fail banks.