Thursday, October 16, 2008

Acquiring a Bad [Bank] Taste in the Swiss Mouth

Sources: Wall Street Journal- Switzerland to Inject Capital Into UBS; Financial Times- Swiss to Fund $60bn ‘bad bank’ for UBS

The Swiss National Bank injected nearly €3.9 billion into a fund that would acquire the toxic U.S. mortgage debts of Europe’s second largest bank UBS early this morning. Unlike the direct equity approach taken by the UK, the Swiss government will buy mandatory convertible notes, which are similar to bonds but convert into shares at a later date like options, of the bad bank assets.

As a result of the investment, the Swiss government will hold a 9% nonvoting share in UBS. Many economists criticized the Swiss government for using public assets to help a private company and warn that too few strings were attached to the deal. Others see the move as the European answer to the latest U.S. bailout proposal of the same ilk.

This is UBS’s third injection this year, with the previous two coming from private fundraising sources. The fund will be directly applied to the EU bailout plan. With the move, UBS hopes to restore confidence in its banking system and dodge increasing criticism that the Swiss government is shirking responsibility to aid the floundering EU economy. These reports surfaced after cross-town rival Credit Suisse raised roughly €6.5 billion from private investors such as the Qatar’s sovereign wealth fund, the Olayan family of Saudi Arabia, and Israel’s Koor Industries earlier this week.

UBS’s services include private banking, investment banking, and asset management. The banking industry accounts for about 15% of Switzerland’s GDP.

Discussion Questions:
1) UBS claims that the deal was not a “bail-out” since it was not on the verge of bankruptcy. This situation contrasts directly with that of the U.S. If UBS’s claim is true, do you believe state funds should have been used to aid the bank? At what point should the injections stop?
2) Notice who bailed out Credit Suisse. Should more thanks be paid to such private funding sources, despite the opportunism of the investment?

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