I meant to mention something about the Credit Suisse situation in Friday’s LinkSwarm but ran out of time. I’m not an expert on European banking in general or Swiss banking in specific. (As opposed to being a squinty, one-eyed, myopic man in the land of the blind sort of expert on American banking, which is not very.) But it’s a big story, so I suppose I should post something about Credit Suisse.
So here’s something.
Late on Thursday, just hours after the SNB had launched the first (of many) bailout attempts of Swiss banking giant Credit Suisse, Bloomberg blasted the following headline:
*UBS, CREDIT SUISSE SAID TO OPPOSE IDEA OF A FORCED COMBINATION
This lack of enthusiasm by UBS to acquire its struggling rival of course forced the Swiss National Bank to front CS a CHF50 billion credit line to hold it over for the next four days amid a furious bank run, one which we said would be woefully insufficient to restore confidence in the collapsing lender, and which we probably used up in just a few hours.
Then, late on Friday, both banks “unexpectedly” changed their minds and we got the following 180 degree U-Turn report from the FT:
*UBS IN TALKS TO ACQUIRE ALL OR PART OF CREDIT SUISSE: FT
So a deal is inevitable after all… but as always, there is a footnote one which we predicted yesterday when we said that a deal would only happen if the acquiring bank – in this case UBS – got a full central bank backstop.
That now appears to be the case with Bloomberg, Reuters and the WSJ all reporting that UBS is asking the Swiss government for a backstop to cover future risks if it were to buy Credit Suisse Group AG, after the Swiss National Bank and regulator Finma have told international counterparts that they regard a deal with UBS as the only option to arrest a collapse in confidence in Credit Suisse. The FT reported that deposit outflows from the bank topped CHF10bn ($10.8bn) a day late last week as fears for its health mounted.
One big take-away: It wasn’t bad investments per se that wrecked confidence in the bank, it was involvement in a series of scandals, as they have “a strong, liquid balance sheet.” “Credit Suisse has instead been plagued by repeated scandals. From spying on a former employee, a criminal conviction for allowing drug dealers to launder money, a massive leak of client data to the media, Archegos, Greensill, Mozambique ‘tuna bonds,’ the list is too long.”
Wait, Mozambique Tuna Bonds? Yeah, it’s a real scandal.
UK courts are at the heart of a spate of litigation arising out of the Mozambique “Tuna bond” or “hidden debt” scandal. The scandal involved $2 billion of bank loans and bond issues from Swiss bank Credit Suisse and Russian bank VTB. The bank loans were taken out in secret by Mozambican state-owned companies, without the legally required approval of the Mozambique Parliament and backed with hidden government guarantees.
The loans were intended to finance contracts between the state companies and a Lebanese-UAE based ship builder, Privinvest, between 2013-2016 for three maritime projects. These projects were intended to boost maritime security and develop the country’s fishing industry. However, a 2017 audit by Kroll found that $500 million of loans could not be accounted for and that Privinvest may have over-inflated prices by $713 million. The audit also found that $200 million of the loans were spent on bank fees and commissions.
So it turns out that Mozambique’s political and business elites are at least as corrupt as our own political and business elites.
Good to know.
Ironically, according to Boyle, the reason European banks may be in better shape than our own is because they had to deal with the fallout of the Euro crisis. “This is not because European banks are very good — it is precisely because they have historically been quite bad.”
Practically every banking regulation in existence commemorates a time when things went badly wrong, and Europe spent a decade toughening up banking regulation because it went through a rolling multiyear euro crisis. The European regulators have a detailed set of standards for testing interest rate risk, with the idea that they will be applied to every significant bank in Europe. Unrealized losses are not ignored under this regime and the global Basel standards on stable funding are applied across the entire banking sector. This is quite different to the regulations applied to community banks in the United States who lobbied the government for regulatory exemptions over the years.
“The economist Matthew Klein argued in a blog post that banks today can be seen as speculative investment funds grafted on top of critical infrastructure, and that this structure is designed to extract subsidies from the rest of society by threatening civilians with crises if the banks’ bets are ever allowed to fail.”
Fear not! The banks that are failing are not woke! OK, they’re woke, but they’re not broke! OK, they’re broke, but they are not without allies who realize that they must support this house of cards freak show. OK, the contagion will take the little people down, but so what? https://t.co/D76Y8svHTL
— 🌴🌴 The Tropical Cow 🐄🌴🌴 (@Tropicow) March 16, 2023
(Hat tip: Stephen Green at Instapundit.)
Finally, it’s a chance to embed the Swiss Banker Song from Making Fiends.