March 25, 2023

The 15th anniversary of the Sunday March 16th in which JP Morgan bailed out Bear Stearns has just passed. It was a buyout before bankruptcy ($2 per share, $270 million with share swap), a necessary fix orchestrated by the Fed, which sweetened the deal for the buyer with $30 billion in liquidity to finance the illiquid assets held by investment banking bears. It represented the first major firecracker of the 2008 subprime crisis that would come six months later.

In September, the government nationalized the mortgage agencies Freddie Mac and Fannie Mae, and the great chain of bailouts was organized in the great Wall Street banking: Bank of America absorbed Merrill Lynch, Warren Buffett invested billions of millions in Goldman Sachs and the Japanese Mitsubishi UFJ Financial targeted the capital of Morgan Stanley… The selection of those days is that you cannot let a bank of that caliber fall due to the expansive effects it has on depositors, investors, companies, households and the economy in general. The force of the blow is directly related to the size.

The best time to head off a banking crisis is before it occurs. To prevent them, there is a somewhat dark and Kafkaesque discipline that is regulation. Despite this, sometimes accidents like the one at Silicon Valley Bank (SVB Financial) can happen. It went from being one of the most reputable and solid banks in California, to imploding in a matter of days. Reuters recounted these days how the disaster that ended with an attack of hysteria and greed that is enough for a Netflix series.

Days before the disaster, the SVB turned to Goldman Sachs to sell more than 20,000 million dollars of its portfolio of public debt bonds with which to provide liquidity to the outflow of deposits from large clients. The sale entailed 1,800 million in losses but Goldman raised in parallel for the entity a capital increase of 2,200 million that failed with a bang in the market. From there to the ‘bank run’ (bank run) that some large venture capital funds and billionaires exacerbated by recommending to their investees that they go to the bank to withdraw their money. The Fed and the SEC have dressed up as Sherlock Holmes and Dr. Watson when detecting signs of some type of crime in what happened. They just have to follow the money trail.

With the mistrust ignited, what we have seen this week is the expansive effect of comparables. If A is wrong, how will B be? All the small and medium-sized banks in the US are on the list of victims. The First Republic Bank, with a size similar to that of SVB (the equivalent of a Sabadell in the context of Europe), has received a different medicine from the regulators because the solution of the SVB has left a scent of political scandal in the making: shareholders and bondholders lose, but the entity’s rich depositors have kept their money.

The FDIC, the Treasury and the FROB have sponsored an injection of 30,000 million dollars in deposits from the 11 large US banks, which, depending on their possibilities, have received with ‘modical’ contributions of 5,000, 2,500 deposits. 2008 when stabbings between bankers were the norm like the death of Julius Caesar at the hands of senators in Shakespeare’s drama. The general-emperor ignores a fortune teller’s warning long ago: “Beware of the Ides of March.”

The forced merger of UBS and Credit Suisse

Chance has wanted that in the middle of the ‘Night of Fire’ (Nit del foc) of the Fallas against the clock of Credit Suisse. Fire rituals always refer to renewal, burning the old and bad for purification. The case in question is radically different from what happened in the US, although the effects are the same: distrust, outflow of deposits and instability in the sector. The Swiss must spend tonight before the flames to clean up Credit Suisse’s reputational problem once and for all.

The truth is that the emblematic Swiss brand has been giving signs for more than two years that it was going to go to the other neighborhood. Since the money laundering scandals, taking care of clients with money of dubious origin or leveraged financing from ‘hedge funds’ and firms that have starred have made it a high-risk bank. Governance and controls have clearly failed, so the problem must be shared by the government, the Swiss central bank SNB and supervisor Finma. The first attempt to put out the bank fire with a hose of liquidity of more than 50,000 million has not worked. More needs to be done.

The solution in the machine that is being worked on since Friday is for its rival UBS to eat Credit Suisse, although not in any way. It must serve to convey a powerful message of trust and a definitive solution. The dicing of his assets, the segregation of his investment bank (former First Boston) on Wall Street in Saudi Arabia. In addition, the buyout must be closed at a price sufficient for all parties to come out well. A case like the SVB in which the owners lose everything cannot be repeated because the stock market ‘crash’ and the rout of the bank shareholders would be served.

Proforma, with data at the end of 2022, the new bank will have an asset perimeter of 1.6 trillion euros, equivalent to the size of Santander, with a market capitalization of 68,000 million euros, a volume of deposits of 726,000 million, 647.00 million in loans and an interest margin (difference between what you pay for deposits and financing in the market, compared to what you charge for lending) rises to almost 49,000 million. A giant in the banking scene with all the power in the sector in Switzerland, but also in other areas such as Six Group/BME, the owner of the Zurich, Madrid, Barcelona, ​​Bilbao and Valencia Stock Exchanges.

If so, UBS will pay for Credit Suisse’s broken dishes with a million-dollar offer, yes, with a discount of more than 70% compared to the same operation that was raised in 2020 or 2021. Now more than 7,000 million on the stock market. Nor can it be denied. On October 15, 2008, UBS was rescued by the central bank SNB with a capital injection with public money and additional liquidity measures. Credit Suisse refused to submit to that rescue and opted for the private route by incorporating the Qatar fund as a reference shareholder in an increase of 10.00 million euros. The trajectories of one and the other show successes and errors of each one.

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