From the Swiss National Bank this morning:
The major Swiss Banks UBS and CS Group today are announcing measures to strengthen their capital base. At the same time, the Swiss National Bank (SNB) establishes the possibility to transfer illiquid assets to a special purpose vehicle (SPV) for orderly liquidation. The SNB has reached agreement with UBS on a long-term financing and orderly liquidation of illiquid securities and other troubled assets in the amount of no more than USD 60 billion. CS Group refrains from making use of such a possibility.
CS is undertaking a fairly substantial capital raising: CHF 10bn, though a mix of common equity, mandatory convertibles and hybrid-tier 1 instruments to a group of “major global investors” (including the QIA). Detail here.
UBS, meanwhile, will raise CHF 6bn in new capital in mandatory convertible notes. You can take a look at the term sheet here.
The real news though is the $60bn bailout fund. Which is exclusively for UBS. The bank will provide $6bn in equity capital, and the Swiss National Bank will provide the rest.
Forget not that barely three months ago, when UBS announced its Q2 results, it had supposedly kitchen sunk its ‘toxic’ assets. BlackRock was sold $15bn of subprime and Alt-A assets in May.
Here’s the latest wares being hastily slung overboard, into the outstretched arms of the Swiss taxpayer:
The assets transferred into the fund include around USD 31 billion (as per valuation at 30 September 2008) of primarily cash securities, previously disclosed in these categories:
-US sub-prime
-US Alt-A
-US prime
-US commercial real estate and mortgage-backed securities
-US student loan auction rate certificates and other securities backed by student loans
-US reference-linked note program (RLN)
The other $29bn? More student loans and auction rate securities – which the bank is being forced to buy back from clients in the wake of several US legal proceedings.
Put this latest broad sellof into context…
… and it’s pretty clear it’s a trend: UBS is deleveraging.
The “toxicity” of the assets it’s dumping are not linked necessarily to their likelihood of default or the way they’ve been structured, but rather, the fact that they are simply levered assets UBS cannot afford to have on its balance sheet.
The trend will be identical for all banks, and as the recession weighs significantly on consumer sentiment and spending, more and more asset classes will turn into unacceptable liabilities for banks.
It’s a debt-deflationary scenario. Which again will bring out comparison to the Great Depression.
From analysts at JPM this morning (highlights ours):
Our 29 selected Euro. banks are at 3.75% equity/asset ratio based on IFRS account. Reaching an eq./asset ratio of 4.5% would require €5.8tn of asset reductions. In total we estimate potential for reductions of €1.2tn from repos, €2.7tn from trading assets, €0.5tn of loan reductions and the balance of €1.5tn needed to come from other assets. The banks most exposed in our view are DB, UBS and BARC looking at current eq/asset ratio and the b/s maturity profile.
Those are figures against which all the Tarps in the world cannot protect the real economy.
As Citi’s European banking analysts said in a note on Wednesday:
If it feels like we are living through history at the moment, it’s probably because we are.