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.
Tags: bank run, banking, Credit Suisse, Crime, Economics, Making Fiends, Mozambique, Social Justice Warriors, Swiss National Bank (SNB), Switzerland, transexual, UBS, video
Those Mozambique tuna bonds will get you every time. I warned them about those Mozambique tuna bonds. I warned them, “Go with the Nigerian tuna bonds. They are backed by a Nigerian prince. It says so right in this email.” But nooooooooooooo … !
Everyone knows that the Mozambique tuna bonds originated in Macedonian content farms.
It’s all grift, all the way down.
I don’t know what is going to happen once everyone figures that all out, but it won’t be at all pretty. The whole thing is flim-flam.
Don’t even go looking at all the chicanery surrounding the international arms trade. Just. Don’t. Not if you want to sleep at night.
Trust me on this… There are excellent reasons the Swiss don’t want the Ukrainians to get 35mm ammo for their German-donated Gepards. Most of them have to do with late-night phone calls from some of their very most “prestigious” clients in the Formerly Soviet Union.
*”… 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 bank’s bets are ever allowed to fail.”*
This. Is. Truth.
What will *inevitably* happen when the risk of failure is removed from the Risk v. Benefit equation is that unsound investments become attractive— and thus failure becomes increasingly likely.
And as unsound, high-risk investments become attractive for banks, so too does criminal activity. This has been going on for quite a while now. Consider for example the case of HSBC back in the Obama administration. HSBC had been under investigation during Bush’s last term, but under Obama a whistleblower came out with documentation of the bank’s involvement in money laundering for cartels and ties to Saudi banks doing business with Al Qaida, among other crimes. By law, HSBC should have lost its license to do business in the USA, and those responsible should have been prosecuted.
Unfortunately, what happened was the Obama administration cut a deal with HSBC whereby no bank executives were prosecuted**, and HSBC was fined $1.9 billion*** and kept its license. As then-Assistant Attorney General Lanny Breuer explained later that year, the administration had decided that to actually enforce the law in the HSBC case would have created an unacceptable “dislocation” in the US banking ecology. What Breuer could not and did not explain was the AG’s decision to forgo prosecution of any of the HSBC executives responsible for that criminal activity. Of course there were articles in the financial news tut-tutting about the decision, but since then “Too Big to Fail, Too Big to Jail” has become a publicly acknowledged part of our fiscal policy.
This will not end well.
______________
** HSBC, in an act of basic hygiene, should have sacked those criminal executives— but in the end the only HSBC employee to lose his job in the scandal was the whistleblower. Of course.
*** $1.9 billion sounds like a steep fine, except that it represented less than 10% of the *profits* of HSBC’s US branch for that fiscal year. If you knew that for 10% of your year’s profits you could have carte blanche to engage in any criminal activity you wanted without fear of prosecution, and your risks would be covered by the government; then what incentive would you have to respect the law?