To keep track of the spreading banking crisis, I’m going to staring making notes here on the blog. This will not be full coverage. Instead, this will highlight some parts of the story as it emerges. This will help me track of developments.
- 3/13/23 – Full bailout for huge bank, rich bankers, and filthy rich depositors.
- 3/1/23 – Rap video explaining artificially low interest rates lead to turmoil and recession.
Update to late Sunday afternoon, 3/19/23 (yeah, it is necessary to time stamp blog posts that closely):
3/16/23 – Wall Street Journal –Eleven Banks Deposit $30 Billion in First Republic Bank – $30 billion of uninsured deposits went into First Republic Bank. Five billion each from J.P. Morgan, Citigroup, Bank of America, and Wells Fargo. 2.5 billion from Morgan Stanley and Goldman Sachs. Five others deposited 1 billion each. Purpose is to shore up liquidity.
Article indicates a large portion, if not most, of the funds are from money that regional banks have moved into the super big banks. They are recycling some of it back to the regional banks. These are uninsured deposits…well…conceptually they are uninsured, but after the bailout that wasn’t a bailout of Silicon Valley Bank, those are essentially insured.
The shoring-up started about four days earlier with money from Morgan.
3/16/23 – Wall Street Journal –Credit Suisse Will Borrow Up to $53.7 Billion – For several days there have been rumors Credit Suisse has been teetering on the edge of collapse. They announced borrowing $50 billion Swiss francs, which is US$53.7 billion, from Swiss National Bank, the nation’s central bank.
Also announced was bank buyback of about 3 billion of US dollar denominated bonds in order to reduce interest expense.
Article says Silicon Valley Bank lost one fourth of their deposits in one day. That is what a modern bank run looks like – 25% of deposits flee in a day.
Looks like the 50 billion backstop for Credit Suisse didn’t work…
3/19/23 – Wall Street Journal – UBS Offers $1 Billion to Buy Credit Suisse– Rumors have been floating all weekend that Credit Suisse was up for sale, with said sale facilitated by the national central bank. Rumor solidified with this article in the Wall Street Journal reporting UBS, a larger rival to Credit Suisse had offered $1 billion to buy the whole bank. Other rumors over the weekend were to slice up the bank and sell the parts.
Graph in the article shows the total assets of the two banks –
For each of the last three year-ends (2020 through 2022) UBS had about $1.1 trillion in total assets. Approximating from the graph, total assets for Credit Suisse were about $0.9 trillion at 12/31/20, just over $0.8 trillion at 12/31/21, and just under $0.6 trillion at 12/31/22. Credit Suisse has been shedding assets for two years.
Another graph shows the market capitalization over the last five years –
For UBS, market cap was about $65 billion at the start of 2018, dropping to around $35 billion early in 2020, rising to about $65 billion at the start of 2022, and is currently about $57 billion.
In contrast, Credit Suisse has been in a steady decline from around $43 billion at the start of 2018, dropping to $20 billion early in 2020, rising to about $35 billion at the start of 2021, and sliding steadily since then to about $8 billion now.
So, on one hand a $1 billion offer to buy a bank with market cap of $8 billion sounds like a bargain. On the other hand, if the investment portfolio were adjusted to market value I’m wondering if all of stockholder equity and most of the bondholders’ position would vaporize. In addition, since customers are scared of contagion a lot of money that’s in Credit Suisse today would flee when those customers become part of the UBS deposit base.
So there is probably far less equity than appears and some other capital flight is likely to take place after a merger. Maybe not much of a bargain after all.
3/19/23 – Breitbart – Credit Suisse balks at $1 billion offer from UBS – The offer at the moment is 0.25 Swiss francs per share which traded Friday at about 1.86 Swiss francs per share. That is a haircut of about 86%. Ouch.
On the other hand an 86% haircut is better than 100%.
Article cites Financial Times as speculating it’s uncertain whether Credit Suisse would survive to close of business on Monday if there isn’t a deal Sunday.
A few hours later…
3/19/23 – Wall Street Journal – UBS Agrees to Buy Credit Suisse for More Than $3 Billion – Haven’t checked the news since six hours prior to writing this paragraph, so the news of course has changed.
Apparently, a deal is done.
UBS will pay over $3 billion to buy Credit Suisse.
In addition, the Swiss government will kick in $9 billion to cover losses the bank may incur. Also, the Swiss National Bank, the central banker in Switzerland, will provide more than $100 billion of liquidity to help cover panicked withdrawals. Not clear if that is an additional $50B on top of previous $50B or whether it brings total to $150B.
Let’s ponder those numbers a few moments…UBS will pay $3B…Central bank will cover up to $9B of losses…
If UBS pays $3B and gets reimbursed $9B, does that mean Credit Suisse is work a negative $6B? For my little ol’ pea-brain, sounds like the current stockholders are getting a fabulous deal. The bank has negative value to the tune of $6B but they get to walk away with something.
To illustrate the magnitude of the collapse and the speed thereof, article says withdrawals over the last week were running $10 billion a day. Let me think… That means the $50 billion liquidity offer by the central bank vaporized last week. With assets around $600 billion at the end of 2022, the bank was losing about 1.7% of their deposits per day, or about 8% in the last week.
As another indicator of the severity, article says the $50 billion liquidity was only enough for Credit Suisse to get to the weekend. So the extra $100B is probably on top of previous $50B.
More to follow, I’m sure.