☀️☕️ UBS + CS = Union Credit Switzerland Bank Corp? (NOT a bailout!)
📊 Also: Stimulating China... Money printer go RRR!; Hedge Fund Short Squeezed!; 🎓 Reserve Ratios... Money printer go RRR!!
Happy Monday!
📝 Focus
UBS + CS = Union Credit Switzerland Bank Corp? (NOT a bailout!)
📊 In the Markets
Stimulating China... Money printer go RRR!
Hedge Fund Short Squeezed!
📖 MoneyFitt Explains
🎓 Reserve Ratios... Money printer go RRR!!
📝 Focus
UBS + CS = Union Credit Switzerland Bank Corp? (NOT a bailout!)
After an all-weekend effort forced by authorities, UBS announced at the eleventh hour it would buy smaller rival Credit Suisse for CHF3 billion (US$3.25 billion) or CHF0.76 per share — under half where it closed on Friday. The purchase price is a tiny fraction of CS’s shareholder equity of $49bn at the end of last year.
“This is no bailout. This is a commercial solution,”
Swiss finance minister Karin Keller-Sutter
The Swiss government will also cover CHF9bn of losses after UBS takes the first CHF5bn of losses on certain assets, and the central bank is giving UBS a CHF100bn liquidity line. Emergency measures are being used to skip the usual consultation period and shareholder vote to get it through before the Monday opening.
UBS management greeting shareholders of Credit Suisse on Monday morning
- Image credit: It's Always Sunny in Philadelphia / 20th Television, Disney ABC via Tenor
The purchase will be paid in new UBS shares (1 UBS share for 22.48 Credit Suisse shares) and comes to 60% below the CHF1.86 it closed at last Friday and 70% under the Friday before. CS’s Additional Tier 1 (AT1) bonds worth CHF16bn are getting totally wiped out. (Communication between the banks had been next to nothing all weekend. An earlier bid by UBS valued CS at CHF0.25 or US$1bn, but was rejected.)
“UBS will remain rock solid… This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue… This is absolutely essential to the financial structure of Switzerland and... to global finance.”
UBS Chairman Colm Kelleher, leaving out that UBS (not CS) got bailed out in the GFC
► On Tuesday last week, Credit Suisse said it had "identified material weaknesses" in its financial reporting, hence delaying publishing its results, always a 🚩. After a decades-long, scandal-ridden, risk-management-free, endless banana-skin-stepping slide, that was just one more slap in the face of long-suffering investors and employees. (Think Archegos, Greensill, corporate espionage, Mozambique tuna bonds, private jets for pandemic sporting events, massive customer data leaks, 2022 losses wiping out a decade's earnings & not expecting to be profitable until 2024, revolving door senior management, flight of $100mn or 38% of its deposits in the fourth quarter of 2022, misleading statements about asset flows etc. etc. And money laundering for a cocaine-trafficking Bulgarian former professional wrestler.)
Finma, Finma, WHY... ARE... YOU... SLEEPING?
- Image credit: Finding Nemo / Pixar via Tenor
► Archrival UBS was down a mere 76% over the same period (JPM of the US is up about 140%) and was leant on heavily by the Swiss National Bank and Finma, its chief banking regulator, to buy up its troubled, now-much-much-smaller rival and therefore save all of Swiss banking. This was their "Plan A" heading into the weekend to salvage confidence in Credit Suisse and, well, themselves. Bloomberg had reported on Thursday both were fiercely opposed to a forced merger.
► The merger creates one of the world's biggest globally systemically important banks (G-SIBs) with total assets at UBS at $1.1tn and Credit Suisse at $575bn. (Scale: ICBC $5.5tn, JPM $3.7tn, HSBC $2.9tn.) It would be Europe’s most consequential banking combination since the 2008 GFC by far. For scale, Credit Suisse’s balance sheet is about twice the size of Lehman Brothers’ when it blew up.
► UBS is already by far the world’s largest wealth manager, or private bank, with Credit Suisse (at least until recently) also in the top 4, along with Morgan Stanley and Bank of America. The combined entity will have about $5tn of invested assets globally.
The merged bank will unite what had once been three giant Swiss banks.
- Image credit: Swiss Bank Corporation
► Meanwhile, intrepid Reuters reporters found that last week several banks had started special treatment of trades with Credit Suisse or its securities. One is asking for gross settlement, which sounds like anything to do with CS these days, but means trading with up-front payment only. Another cut down of all loans to CS with no collateral. Yet another slashed the lending value it assigns to CS issued bonds put up by its own clients as collateral for loans.
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📊 In the Markets
What a week. US and European markets resumed their slide after Thursday's "dead cat bounce" which had been led, ostensibly, by rescues of troubled banks Credit Suisse (loan from its central bank) and First Republic (deposit by JPM and other self-interested banking giants.) But at least that drew to close a tumultuous week dominated by an unfolding crisis-not-a-crisis-yikes-still-not-a-crisis in the global banking sector, mounting fears of a recession and maybe some evidence of central bankers losing the plot.
If you're asking if the previous Sunday's decisive Bailout-not-a-bailout of Silicon Valley Bank was still "not-a-bailout", well, the Federal Deposit Insurance Corporation (FDIC) is now willing to propose backstopping or sharing losses at SVB and Signature Bank if it will help to get a buyer for those failed lenders. Starts to smell a little like a bailout.
► A straight sale of either would trigger immediate losses to the buyer because it would have to mark down the price of some assets to reflect the current market value. (Even the "no-taxpayer-money" part of the original proposal hid the fact that all other depositors everywhere would be subtly bearing the costs, eventually.)
Ratings agency Moody's downgraded the credit of First Republic Bank on Friday, citing deterioration in the bank's financial profile and challenges faced by the lender due to deposit outflows. (Rivals Fitch and S&P Global slashed the bank's ratings on Wednesday.)
► It said the bank's high cost of borrowings, along with the "high proportion of fixed rate assets at the bank, is likely to have a large negative impact on First Republic's core profitability in coming quarters." This means that the interest rate on what it pays depositors --and other ways it now has to get money-- are up (a lot) while what it charges on most of what it's lent out is fixed. Banks make the difference between those as profits if they don't mess it up, especially when interest rates move. That's the #1 job. And they messed it up.
Bond rating agencies - a mini-explainer
Bond rating agencies are companies that evaluate the creditworthiness of bond issuers, indicating the risk of default, and all are regulated by the SEC.
They use a scale to assign ratings to bonds, ranging from AAA (highest credit quality) to D (default). Investment grade bonds are typically rated "BBB-" or higher by S&P and Fitch and Baa3 or higher by Moody’s.
Potential conflict of interest arises when the rating agency is paid by the bond issuer to evaluate their bonds, leading to a conflict between the need to provide accurate ratings and the desire to retain the issuer's business.
Stimulating China... Money printer go RRR!
China's central bank, The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) 🎓 by 0.25% from March 27 to “make a good combination of macro policies, improve the level of services for the real economy, and keep liquidity reasonably sufficient in the banking system.” (Didn't really say anything.) Basically, this cuts the amount of cash that banks hold as reserves, which frees them to lend money into the economy and "add liquidity." This is effectively printing money and supports efforts to keep a nascent economic recovery on track. (The last cut was in December, also 0.25%.)
► The move came earlier than experts were expecting, particularly after a subdued forecast of just 5% economic growth from outgoing premier Li Keqiang, though it is an acceleration from the feeble 3% logged in 2022. Pessimists may suggest increasing uncertainty from the top over the sustainability of what's so far been an uneven recovery.
► That said, China's home prices rose in February, possibly the result of enormous efforts by Beijing to revive the important, battered and deeply troubled market. New home prices rose 0.3% after being unchanged in January, with secondary markets snapping an 18-month decline to soar 0.12%. The aim is for a soft landing in the real-estate sector, actually, rather than trying to get back to the days of endless, assured rapid growth in prices and unit sales.
Money printer go RRR
- Image credit: Tenor
Hedge Funds Short Squeezed! (And not by meme stocks!)
If you thought the volatility in stock markets was wild, volatility in the $22tn market for US Treasuries following the collapse of Silicon Valley Bank has been off the charts, the highest since the global financial crisis of 2008. The price of two-year Treasuries, the most sensitive to the outlook for interest rates, rocketed higher, sending yields (the interest rate you actually get at the price, and which moves in the opposite direction) down by an unheard-of 0.56%.
► Not only because of the pressure ever higher rates put on bank balance sheets from unrealised losses (leaving aside gains on higher spreads) but also because many commercial banks will start pulling back on their lending given the intense scrutiny of their balance sheets these days... which kind of does the central bankers' jobs for them. Win! Also, deposits getting pulled out of banks end up in money market funds (net inflows of $120bn for the week were the highest since 2020) which then turn directly into even more demand for US Treasuries (or even directly.) Not a win for the Fed.
This is really really not normal
- Image credit: Tradingview
► But that's a really huge move. As we pointed out in the "higher-for-longer" segment in Thursday's MFM, hedge funds were heavily short bonds (and most others were "underweight")... since that same trade had made them tons of profits in 2022 as interest rates went up and up and up. They also sucked in new money from late-to-the-party investors who basically told them "I'll have what she's having." And, that being an absolutely-everyone consensus strategic view going into the year, they were absolutely carted out when the environment changed with the massive short squeeze in short-term bonds.
📖 MoneyFitt Explains
🎓️ Reserve Ratio (banks)
Or "reserve requirement ratio" (RRR) refers to the share of its deposits that a bank is required to hold in reserve, either in its vaults or with the central bank. It is the core element of the fractional reserve banking system.
When the bank lends out the balance of its deposits, it can earn interest and make a profit. In doing so, it also creates a new asset (the loan) and a new liability (the deposit made by the borrower, in whichever bank it ends up in) and therefore increases the money supply. The “money MULTIPLIER” is 1/RRR. (The smaller the RRR, the bigger the multiplier.)
The reserve ratio is one of many tools that central banks can use to manage the money supply and maintain stability in the economy. Lowering the reserve ratio increases the amount of money banks can lend, leading to an increase in the money supply, which stimulates economic activity, and vice versa.
The central banks that have historically used reserve ratios more actively as a tool for monetary policy include China, India, Brazil and Argentina. (The clue is in the name. The Federal Reserve System, the US central bank, gets its name from its role in regulating the reserve requirements of US banks.)
