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Explained: What Triggered UBS' Takeover of Crisis-Hit Credit Suisse?

UBS took over Credit Suisse after the latter collapsed on Sunday owing to losses and scandals over the last 2 years.

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Credit Suisse, one of the strongest pillars of banking in Switzerland, collapsed like a pack of cards in the previous week – triggered by a number of fatal financial losses and scandals.

The outcome: a takeover by its banking rival UBS for $3.23 billion.

The development came as a shock to world markets, as the 167-year-old Credit Suisse Group was among 30 banks in the world deemed too large to fail.

However, its share prices nosedived on Wednesday, 15 March, taking the company's fortunes down with it and reaching its culmination on Sunday, 19 March.

The takeover by UBS was backed by Swiss authorities, who put the plan into action to avoid a global banking crisis similar to the fall of the Lehman Brothers in 2008.

UBS also agreed to assume up to $5.4 billion in losses suffered by Credit Suisse as part of the takeover arrangement.

"It's a historic day in Switzerland, and a day frankly, we hoped, would not come," UBS Chairman Colm Kelleher said after the conclusion of the deal, according to Reuters.

"I would like to make it clear that while we did not initiate discussions, we believe that this transaction is financially attractive for UBS shareholders," he added.

Explained: What Triggered UBS' Takeover of Crisis-Hit Credit Suisse?

  1. 1. Key Details of the Deal

    • According to the arrangements of the deal, UBS will take over several key portfolios of Credit Suisse, including wealth management, asset management and Swiss domestic banking. The sum total of these portfolios includes Credit Suisse's retail banking and loans to small and medium enterprises.

    • The takeover will be an all-share transaction. Credit Suisse stakeholders will receive one UBS share for every 22.48 Credit Suisse shares.

    • The deal, however, will not be subject to a shareholder vote, as per an agreement reached with Swiss authorities.

    • Credit Suisse said in a statement that the merger is expected to be completed by the end of 2023.

    • To ensure the closing of the deal, the Swiss government has given UBS a guarantee of nine billion Swiss francs to deal with potential losses arising out of Credit Suisse's assets, according to AFP.

    Expand
  2. 2. What Are the Reasons Behind Credit Suisse's Collapse?

    Credit Suisse has been in financial turmoil for around two years now, having been hit by a number of scandals and losses. Let us look at the reasons behind its disintegration:

    1. Greensill & Archegos Go Kaput

    The bank's misfortunes began when Greensill, a British financial firm specialising in short-term corporate loans, met with failure in 2021.

    Credit Suisse, which was particularly invested in the firm, was at the receiving end of massive losses after its collapse. After Greensill declared insolvency in March 2021, Credit Suisse shut down four connected funds in which it had invested $10 billion.

    Four weeks after Greensill collapsed, Credit Suisse suffered a further loss of $5 billion after the implosion of US hedge fund Archegos.

    2. Mozambique Bribery Scandal

    In October 2021, Credit Suisse was involved in an alleged bribery scandal in Mozambique in connection with loans that it granted to two government-owned firms.

    The loans, which were provided between 2013 and 2016, were supposed to be used for maritime surveillance, fishing and shipyard projects, but a portion was allegedly diverted for bribes, according to AFP.

    As a result, the bank was fined $475 million by British and US authorities.

    3. Breach of COVID-19 Rules

    Just nine months after Lloyds Banking Group's former chief Antonio Horta-Osorio was appointed as Credit Suisse's chairman in April 2021, he was forced to step down after it came to light that he had violated Switzerland's COVID-19 guidelines.

    4. Suisse Secrets

    A media investigation published in February last year, titled "Suisse Secrets," stated that the bank had allegedly held billions of dollars of black money for several decades.

    The report, backed by the Organized Crime and Corruption Reporting Project – a global network of investigative journalists – said that leaked data from the 1940s onwards showed that Credit Suisse was holding over $8 billion in the accounts of criminals, dictators, and rights violators.

    The bank, however, denied the report, saying that it was based on "partial, inaccurate, or selective information taken out of context." However, the damage to its reputation was immense.

    5. Bermuda Court Ruling

    In March 2022, a judge in Bermuda ruled that former Georgia Prime Minister Bidzina Ivanishvili had suffered a loss amounting to $553 million due to the failures of an affiliate of Credit Suisse.

    The case was in relation to the actions of Patrice Lescaudron, one of the top bankers at Credit Suisse, who was sentenced to five years of imprisonment by Swiss authorities on charges of forgery and fraud in 2018. Lescaudron died by suicide in 2020.

    In its ruling, the court said that bank "was prioritising the revenues Mr Lescaudron generated for Credit Suisse over the interests of its clients," AFP reported.

    6. Bulgarian Cocaine Network

    In June last year, the bank was slapped with a fine of $2 million in an alleged money laundering case connected with Bulgaria's cocaine supply network.

    The Swiss Federal Criminal Court ruled that Credit Suisse had failed to prevent money laundering by a criminal outfit in connection with incidents dating back to 2007-08.

    7. Old Disputes

    In October last year, the bank said that it would pay a settlement of $495 million to the US state of New Jersey over mortgage-backed securities dating back to the 2008 global financial crisis.

    In the same month, it agreed to pay France 238 million euros to avoid prosecution on charges of money laundering and tax fraud brought before it in 2016 over illegal accounts of French citizens.

    Expand
  3. 3. How Did Banks & Markets React To the Takeover? 

    Banks and markets alike welcomed the development, and said that the merger was a key step to avoid a global financial crisis, especially in the backdrop of the recent collapse of the Silicon Valley Bank.

    The European Central Bank said on Sunday that the takeover of Credit Suisse was "instrumental" in restoring calm in financial markets, according to Reuters.

    The banks of England and the US also expressed similar enthusiasm.

    Max Georgiou, a market analyst based in London, said, "Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry."

    He added that the takeover could alter the course of not only European banking, but also the wealth management industry in general.

    On the other hand, Octavio Marenzi, the CEO of management consultancy firm Opimas, expressed dismay over the state of affairs and said that Switzerland's standing as a financial centre had been tarnished.

    "The Credit Suisse debacle will have serious ramifications for other Swiss financial institutions. A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away."
    Octavio Marenzi

    (With inputs from AFP and Reuters.)

    (At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

    Expand

Key Details of the Deal

  • According to the arrangements of the deal, UBS will take over several key portfolios of Credit Suisse, including wealth management, asset management and Swiss domestic banking. The sum total of these portfolios includes Credit Suisse's retail banking and loans to small and medium enterprises.

  • The takeover will be an all-share transaction. Credit Suisse stakeholders will receive one UBS share for every 22.48 Credit Suisse shares.

  • The deal, however, will not be subject to a shareholder vote, as per an agreement reached with Swiss authorities.

  • Credit Suisse said in a statement that the merger is expected to be completed by the end of 2023.

  • To ensure the closing of the deal, the Swiss government has given UBS a guarantee of nine billion Swiss francs to deal with potential losses arising out of Credit Suisse's assets, according to AFP.

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What Are the Reasons Behind Credit Suisse's Collapse?

Credit Suisse has been in financial turmoil for around two years now, having been hit by a number of scandals and losses. Let us look at the reasons behind its disintegration:

1. Greensill & Archegos Go Kaput

The bank's misfortunes began when Greensill, a British financial firm specialising in short-term corporate loans, met with failure in 2021.

Credit Suisse, which was particularly invested in the firm, was at the receiving end of massive losses after its collapse. After Greensill declared insolvency in March 2021, Credit Suisse shut down four connected funds in which it had invested $10 billion.

Four weeks after Greensill collapsed, Credit Suisse suffered a further loss of $5 billion after the implosion of US hedge fund Archegos.

2. Mozambique Bribery Scandal

In October 2021, Credit Suisse was involved in an alleged bribery scandal in Mozambique in connection with loans that it granted to two government-owned firms.

The loans, which were provided between 2013 and 2016, were supposed to be used for maritime surveillance, fishing and shipyard projects, but a portion was allegedly diverted for bribes, according to AFP.

As a result, the bank was fined $475 million by British and US authorities.

3. Breach of COVID-19 Rules

Just nine months after Lloyds Banking Group's former chief Antonio Horta-Osorio was appointed as Credit Suisse's chairman in April 2021, he was forced to step down after it came to light that he had violated Switzerland's COVID-19 guidelines.

4. Suisse Secrets

A media investigation published in February last year, titled "Suisse Secrets," stated that the bank had allegedly held billions of dollars of black money for several decades.

The report, backed by the Organized Crime and Corruption Reporting Project – a global network of investigative journalists – said that leaked data from the 1940s onwards showed that Credit Suisse was holding over $8 billion in the accounts of criminals, dictators, and rights violators.

The bank, however, denied the report, saying that it was based on "partial, inaccurate, or selective information taken out of context." However, the damage to its reputation was immense.

5. Bermuda Court Ruling

In March 2022, a judge in Bermuda ruled that former Georgia Prime Minister Bidzina Ivanishvili had suffered a loss amounting to $553 million due to the failures of an affiliate of Credit Suisse.

The case was in relation to the actions of Patrice Lescaudron, one of the top bankers at Credit Suisse, who was sentenced to five years of imprisonment by Swiss authorities on charges of forgery and fraud in 2018. Lescaudron died by suicide in 2020.

In its ruling, the court said that bank "was prioritising the revenues Mr Lescaudron generated for Credit Suisse over the interests of its clients," AFP reported.

6. Bulgarian Cocaine Network

In June last year, the bank was slapped with a fine of $2 million in an alleged money laundering case connected with Bulgaria's cocaine supply network.

The Swiss Federal Criminal Court ruled that Credit Suisse had failed to prevent money laundering by a criminal outfit in connection with incidents dating back to 2007-08.

7. Old Disputes

In October last year, the bank said that it would pay a settlement of $495 million to the US state of New Jersey over mortgage-backed securities dating back to the 2008 global financial crisis.

In the same month, it agreed to pay France 238 million euros to avoid prosecution on charges of money laundering and tax fraud brought before it in 2016 over illegal accounts of French citizens.

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How Did Banks & Markets React To the Takeover? 

Banks and markets alike welcomed the development, and said that the merger was a key step to avoid a global financial crisis, especially in the backdrop of the recent collapse of the Silicon Valley Bank.

The European Central Bank said on Sunday that the takeover of Credit Suisse was "instrumental" in restoring calm in financial markets, according to Reuters.

The banks of England and the US also expressed similar enthusiasm.

Max Georgiou, a market analyst based in London, said, "Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry."

He added that the takeover could alter the course of not only European banking, but also the wealth management industry in general.

On the other hand, Octavio Marenzi, the CEO of management consultancy firm Opimas, expressed dismay over the state of affairs and said that Switzerland's standing as a financial centre had been tarnished.

"The Credit Suisse debacle will have serious ramifications for other Swiss financial institutions. A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away."
Octavio Marenzi

(With inputs from AFP and Reuters.)

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

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Topics:  Switzerland   UBS   Credit Suisse 

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