Adam Cochran (Adamscochran.Eth)
SNB pushing UBS to buy CS.
CS already had a $50B bailout from SNB.
UBS is asking for even more to cover *any* future risks if it is to buy CS.
Swiss National Bank is an mcap of $450M and did revenue of $10B last year.
The Swiss annual budget is $10B/year
The entire GDP of Switzerland is only $800B.
UBS is around a $50B mcap.
CS is around $8B mcap right now, but clearly much larger liabilities.
This whole thing is moving towards disaster.
The Swiss have extended 5 years worth of budget already on this, to no resolve.
If they have to shell out the same again to cover CS risk and some level of UBS risk on HTM securities, then we’re looking at them spending 8 years worth of annual budget, and 12.5% of the entire country GDP on this bailout.
So the best case for them is it resolves, but it means huge inflation on the Swiss Franc.
But the Swiss Franc is a valuable currency because of:
-Strong stable backing
-Gold backing (mostly from CS)
So in one year, you’ve lost faith in the Swiss banking system, lost faith in your largest gold minter, and lost faith in low inflation.
That likely leads to less Swiss banking overall, large monetary outflows and a weakening currency.
13.9% of the Swiss economy (and 10.2% of its jobs) come from the financial sector.
Roughly another 7% from being a commodities trading hub – and 4% from being where international companies HQ (because of the banks)
So a sliver shy of 25% of the Swiss economy gets badly hurt if your faith in Swiss banks or Swiss Francs folds.
This leaves their economy propped up, by, I kid you not:
If you nuke the jobs and financial sector in Switzerland and get large unemployment, you’re going to get a major negative feedback loop.
But you’ll also get banks that are *WAY* less profitable.
We already know UBS has been hurting in their asset management and investment bank practices – and so other global bulge bracket banks (Deutsche Bank, HSBC, Goldman Sachs, etc) can easily swoop in on those clients.
UBS is on track for somewhere around $5B on earnings this year and already has some pretty extensive liabilities on its own book, including $862B in short-term liabilities which are not covered by its $573B in short term assets.
It’s also sitting on its own pile of $374B in debt, add that to the $100B of debt CS had at the end of last year, the new $50B debt bail out to SNB, and the $8B buy out price
That’s $532B in debt load before any new backstop debt, or their own impairments.
UBS has roughly $1.1T in assets and roughly $1T in liabilities.
So a $0.1T buffer (or $100B)
But we’re adding $158B in new debt + they are asking for more borrowing and likely have their own new impairments, and that assumes the situation doesn’t get worse.
So if the deal goes through, then UBS is technically insolvent on day 1 (which is why they need the SNB backstop)
And if they put 100% of their earnings into paying down this debt, with no interest, it would take 22 years to pay off the new debt from CS.
That would mean cutting the dividend, no new investments, no growth, no new spending, and no servicing their own debt, and it would still take *a quarter of a century* to pay off this debt and reach solvency.
No wonder they want the government backstop.
This now means, one institution will have 10% of the Swiss GDP in underwater debt, and 1.2x the entire Swiss GDP as total liabilities.
Even if by some miracle this works – all we’re doing is creating an even bigger, riskier powder keg.
The government doesn’t have much choice.
This is what happens when we keep making patchwork economic decisions to deter short-term pain instead of favoring long-term stability.
We’ve created monstrous institutions that we can’t let fail, but we also can’t really save.