UBS agrees to buy Credit Suisse

This is an audio transcript of the FT News Briefing podcast episode: ‘UBS agrees to buy Credit Suisse’

Marc Filippino
Good morning from the Financial Times. Today is Monday, March 20th, and this is your FT News Briefing.

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Swiss central bankers have brokered a historic crisis merger. The White House is under pressure to guarantee more bank deposits. And the failure of Silicon Valley Bank has been a painful learning curve for tech start-ups.

Andrew Edgecliffe-Johnson
There’s a very clear lesson here that you do not want all of your eggs in one basket.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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It was a frantic and historic weekend for Swiss banking. The country’s second-largest bank was crumbling. Nervous customers had been yanking their money out of Credit Suisse and investors were dumping the lender’s shares. The Swiss central bank had to do something drastic. So yesterday, they got their largest bank, UBS, to buy Credit Suisse for three and a quarter-billion dollars.

Arash Massoudi
Its company stopped trading Swiss franc value of $1 and 86 cents on Friday and is being required in stock by UBS for 76 cents. It’s a dramatic haircut to its equity price.

Marc Filippino
The FT’s Arash Massoudi covered the negotiations and said this is probably a new one for Swiss authorities.

Arash Massoudi
Now, this is absolutely unprecedented and it’s sort of an unthinkable episode. I mean, if you think about these two banks in the city of Zurich, they literally are headquartered 100 feet away from each other. The rivalry between these two banks has been immense. Credit Suisse has existed for 167 years, and now it is being subsumed in a panic weekend by its across the square rival in the very parochial Swiss kind of, you know, set-up of Zurich.

Marc Filippino
So, Arash, what did Swiss authorities do to broker the deal?

Arash Massoudi
After the collapse of Silicon Valley Bank and Signature Bank, the Swiss central bank stepped in and provided a $54bn credit line that was designed to basically deal with the heavy levels of outflows that were coming from Credit Suisse. But it was clearly not enough. And there, not soon thereafter, UBS was instructed to begin working on a takeover.

Marc Filippino
Yeah, but why would UBS agree to buy Credit Suisse? I mean, Credit Suisse is, is just riddled with internal troubles. Was UBS just doing Swiss authorities a favour? Do they see any value in this?

Arash Massoudi
So you could take a very long term view that one, there is some value here and you made a good deal because you’re picking up something that’s worth something from very cheap. And two, you know, you’re doing a solid for the Swiss government and therefore they’re gonna further have your back and probably doing a solid for the global financial system. So that would be the sort of bull case from UBS. UBS has been awaiting this phone call from the Swiss regulators and Swiss authorities for months. There was a period in October where people there was a panic around the Credit Suisse, and they began basically at that point preparing a playbook for what they would need to do with the inevitable 999 call that’s equal to our 911 here in the UK. The 999 call came in and this week and they basically have them opened that playbook. So that was the, that was essentially the situation with UBS.

Marc Filippino
Is there any concern that the Swiss National Bank over-reached, that they they went a little too far?

Arash Massoudi
At this point, we need to be honest, which is that it is very likely that Credit Suisse was gonna be bankrupt if it opened up this week. The knock-on consequences of that bankruptcy probably would have had seismic impact on the global financial system. And so I think the Swiss, Swiss would take the view that — and I think it’s supported by the US and UK regulators — that they’ve dealt with this now. They’ve fended off what could have been a massive, massive scare in the financial system.

Marc Filippino
And is there any sense of whether this will work to cap the contagion?

Arash Massoudi
It’s too early to tell. Last week, Silicon Valley Bank and Signature Bank went down. This week, Credit Suisse required a rescue. So we started in the US. Now we’re in Switzerland, and we’re gonna have to watch very carefully to see where it goes from here. But it is too early to make a call if we’re out of it. It certainly is not necessarily the mood music I’m hearing.

Marc Filippino
Arash Massoudi is the FT’s corporate finance and deals editor. He also edits our Due Diligence newsletter. We have a link to that in the show notes.

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The Credit Suisse deal means big losses for its shareholders and bondholders. So just hours after the UBS merger was announced, several major central banks came out with a plan to improve US dollar liquidity. It’s to guard against additional stress in the markets. The group includes the Federal Reserve, the European Central Bank and central banks in England, Canada, Japan and Switzerland. They jointly agreed to make funding available via standing swap lines on a daily basis. Previously, this was done weekly. The central bankers said in a joint statement that the move will ease strains in global funding markets.

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Let’s take a look at the US, where the banking troubles all started, first with the collapse of Silicon Valley Bank, then Signature Bank. We’ve got First Republic teetering. Anyway, the Biden administration is trying to restore calm. It’s also under pressure to expand the US government’s guarantee on bank deposits. Currently, it insures up to $250,000. Here’s the FT’s Joshua Franklin with more.

Joshua Franklin
I don’t think you could underplay how big an impact that would have on banking. This would have potentially huge ramifications in terms of how people looked at the safety of banks, but also potentially how banks are run. Not to say that just because deposits are guaranteed that the banks would be, you know, overnight would go into even riskier casinos than some people already look at them as, as they are. But when you know you have a government guarantee across all of your deposits, that that will certainly have a big impact on how banks are run.

Marc Filippino
Now we should be clear that any change is still far off. Right now, it’s largely political debate. Who in banking wants this?

Joshua Franklin
So you’ve got a number of the bank lobby groups who have said that they would support this, especially lobby groups for the smaller and regional banks, which are coming under a lot of pressure with, with deposit outflows at the moment, because there’s been this big flight to quality for the bigger banks that are seen as, as being safer in the event of a, of a crisis. But the crucial thing to remember is the Biden administration on its own doesn’t have the unilateral power to lift the deposit insurance. That actually now requires an act of Congress. And that’s because of the Dodd-Frank Act coming out of the last financial crisis.

Marc Filippino
You mentioned deposit outflows and a flight to quality. That’s been another effect of this banking crisis. Can you talk a little bit more about that?

Joshua Franklin
Yeah, no, there definitely has been this kind of so-called flight quality during this period. Because you look at the biggest banks, you know, the JPMorgan Chase’s, the Bank of America’s, the Wells Fargo’s — they’re deemed systemically important to the US economy and to the global economy. So there’s this feeling there’s this almost implicit government backed-guarantee of banks like this, that the government just wouldn’t allow these banks to fail. Is this how a lot of, a lot of customers and a lot of people look at these things. So they feel that they’re, you’re safe putting your money in there. So you’re, you’ve seen this kind of migration of money of deposits from the smaller banks to the bigger banks. And that’s definitely a trend that a lot of people do feel like is going to continue and exacerbate. And that leads onto this broader question that’s about the US market. And then in the US, you have, you know, around 4000 banks. And there’s this perennial question about whether or not the US actually needs all of these banks. And so this could be a scenario where that question is answered in a pretty meaningful way.

Marc Filippino
Joshua Franklin is the FT’s US banking editor.

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The past two weeks have been a rude awakening for start-ups.

Andrew Edgecliffe-Johnson
Well, I spoke to one founder who told me we got our MBA in corporate banking. And I think there’s a very clear lesson here that you do not want all of your eggs in one basket.

Marc Filippino
That’s the FT’s US banking editor, Andrew Edgecliffe-Johnson. He’s been speaking to founders about the Silicon Valley Bank collapse.

Andrew Edgecliffe-Johnson
When the money’s flowing, you pay less attention to it. And this is a group of companies for whom the money has been flowing. The venture capital ecosystem has been flush with cash. They’ve been very eager to deploy it with these exciting new start-ups. And the exciting new start-ups have been very focused on other things, namely growth. They’ve not been thinking very much about risk and the usual balance in a company that grows more slowly is between that growth appetite and that consciousness of potential risks. And here the picture we’re getting of Silicon Valley and the start-ups around it is sort of that balance getting knocked off balance, essentially.

Marc Filippino
Edge says venture capitalists are now advising the start-ups they work with on how to manage their cash.

Andrew Edgecliffe-Johnson
So what we’ve seen from some of the VC groups, big names like General Catalyst and Greylock, is they’re now saying you need to diversify your risk. You need to keep accounts with 2 to 3 separate banks at a time, including one of the big four banks like Bank of America, Citi, JPMorgan and Wells Fargo, that, you know, the government is gonna stand behind. So it’s a very fundamental piece of advice like that that we’re hearing from the venture capital community now.

Marc Filippino
That’s the FT’s US business editor, Andrew Edgecliffe-Johnson.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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