Exclusive: Ex-Credit Suisse director says UBS deal could worsen bank contagion
SIMONE DEL ROSARIO: Over the weekend, Switzerland’s largest bank has agreed to by its struggling rival Credit Suisse in a deal worth 3.2 5 billion. Credit Suisse has faced its share of troubles for years. But the stunning end to the institution after 166 years, is shaking Banking Markets around the globe, the two banks could receive more than 280 billion in state and central bank funding as part of the deal. According to the deals documents reported by Reuters, but Swiss finance minister Karen Keller-Sutter insists the move is not a bailout, but a commercial solution. Then addressed the concept of too big to fail.
KARIN KELLER-SUTTER: I mean, the too big to fail framework couldn’t have be applied here, really, because usually, you know, this is supplied to a bank that cannot meet its liabilities anymore. And here we had a problem of liquidity. So it is not typical at all.
SIMONE DEL ROSARIO: She added that a bankruptcy of the nation’s second largest bank could have created a contagion effect causing huge collateral damage. I want to bring in Hal Lambert now, he’s the founder of Point Bridge Capital and a former director at Credit Suisse, managing assets in excess of $1 billion. Hal, do you think this buyout is going to calm contagion fears?
HAL LAMBERT: No, I don’t think it’s going to at all, I think it’s going to exacerbate it. You know, if you think about what she just said, there, it wasn’t a built in ability to meet the liabilities is a liquidity problem? Well, when you have a liquidity problem, that means you can’t meet your liabilities. So, you know, I don’t know what she’s quite saying there. But it is not going to stem it. In fact, now, what you’ve created is this monstrous bank in Switzerland. And I don’t know what they’re going to do now that you have UBS and Credit Suisse merged together, you have one institution now that literally could could collapse the Swiss economy, if it were to have a problem. So this is not the end of things, this is the very beginning of something they’re going to have to work through over many years to try to reduce that systemic risk that they now have with one giant bank like UBS. And then of course, you’ve got Deutsche Bank, BNP Paribas, some other banks in Europe, that are down significantly this morning after this news, because of course, they have their own issues. And I think we’re gonna have some more banking issues in the United States as well. So this is not, this is not solving the problem, it’s likely creating more fear out there.
SIMONE DEL ROSARIO: There’s a lot to get into how I want to start with this, though Credit Suisse has had its fair share of trouble over the past few years, but had SBB not collapsed. Do you think that Credit Suisse would still be standing today?
HAL LAMBERT: They probably would still be standing at this moment. But that but they’ve had, as you just said, they’ve had problems for years, and they’ve lost billions of dollars in bad decisions. It’s really been poorly managed for the last few years. And if you look at what they lost last year, was $7 billion over $7 billion last year. So they were they were already having problems. Would they still be there right now, probably, I think this created a situation where, you know, bank failures in the United States caused European markets to get more nervous. But you know, I don’t know that it meant that they would be here six months from now. So the Swiss National Bank should have started a much longer time period ago, they they should have been on this a couple of years ago, and looking for solutions to reduce the risk of Credit Suisse. Because again, the size of the bank, not from a market cap standpoint, but from an asset standpoint, was very, very large for the for the country. And so they needed to have been on top of this working through how to reduce the risk at Credit Suisse, probably two to three years ago, rather than this kind of pushed over the weekend solution that they’re claiming as a market solution. When it’s really we all know everyone knows that this is a forced merger by the government of Switzerland for UBS to purchase Credit Suisse, UBS did not want to do this deal.
SIMONE DEL ROSARIO: Yeah, we’re talking about a real pressure cooker situation when it comes to the banking industry across the globe, Credit Suisse has specific demise seems tied to the annual report that came out last week that declared the bank had material weakness and its financial reporting. And with the sentiment going on with banks, it was just a terrible timing for them. Do you think that there are more institutions out there that have cracks like this that will become casualties of the banking turmoil happening?
HAL LAMBERT: Well, sure, I mean, Deutsche Bank is one from a global standpoint that has had trouble for years that you could almost put in a similar category, meaning they’ve just had problem after problem like Credit Suisse has. So I don’t know whether they have a risk of liquidity problem right now or not. But but they’re certainly under a lot of pressure. And then if you look at the United States, I mean, there’s about 4000 banks in the United States. So you know, I read that there’s about 200 of those that could have some problems. You’ve got to figure with that number. You’re going to have one or two at least more banks that are going to have similar problems to Silicon Valley. And then what’s the, what’s the Fed going to do? Are they going to let depositors at those banks lose their money and start picking winners and losers at the regional bank level, you know that that’s a real problem that that will create a lot of uncertainty around the US system as well. And then, you know, they’ve already picked winners and losers, because they made the systemic banks, the large ones, the JP Morgan’s the Wells Fargo’s, the Bank of America’s too big to fail. So people are putting deposits into those banks, because of the implicit bailout guarantee that the government has for depositors there. And, you know, that’s again, picking a winner over a regional bank. So, you know, it’s a real problem that, you know, we’re trying to do these one off hodgepodge solutions globally. I think they’re gonna have to really get it together to stem the the lack of trust really, that’s out there in the marketplace on banks.
SIMONE DEL ROSARIO: Going back specifically to UBS for a second to you mentioned that this was kind of something that they did begrudgingly, they basically got Credit Suisse for pennies. Here’s how the chairman plans to rein it in.
UBS CHAIRMAN COLM KELLEHER: Let me be very specific on this. UBS intends to downsize Credit Suisse, his investment banking business, and align it with our conservative risk culture.
SIMONE DEL ROSARIO: How what does this tell us about the risk environment we’re facing?
HAL LAMBERT: Well, yeah, I mean, UBS, not only did they are they doing that, that, you know, they got another 100 billion dollars from from the Swiss National Bank and kind of a backstop, they’ve got some additional billions, in first losses that the s&p is going to take, I believe was 9 billion there. They’re 16 billion of, of debt that’s supposedly going to go to zero, not sure exactly how that works, because debt holders are supposed to be senior to equity holders. But again, this whole thing is being put together by the government, and the Swiss National Bank. So I guess they could do what they want to do. Which again, though, that creates uncertainty when you start making changes in the rules of the game effectively, to make deals happen. But yeah, I think there’s gonna be a lot of layoffs, what UBS is going to see, as you know, when you’ve got a lot of a lot of investors have assets at both banks. So then when you combine them, they’re going to look out and go, Wait, I don’t want to have this much at one bank now, because I’ve already spread my risk out. So I think you’re likely to still see asset outflows. But just from a risk reduction standpoint for investors that don’t want to have too much now in one giant bank, meaning UBS.
SIMONE DEL ROSARIO: The Swiss finance minister, as we talked about, said that this is a commercial solution, not a bailout for when you’re talking about giving these banks access to funds, which are tantamount to a third of Swiss GDP. What’s your read on it?
HAL LAMBERT: Right, that’s that’s the big risk, right? These banks are so large. I mean, you look at Credit Suisse, his loan book was probably three times the size of Silicon Valley Banks. So you know, it’s very large. And then when you look at it on a GDP perspective, as you just said, you know, Switzerland is obviously much smaller than the United States. So it’s much harder for Switzerland to absorb this. And let’s, you know, let’s be real. I mean, banking is Switzerland. I mean, that’s their number one economic growth driver. So this is a really bad situation for Switzerland as a whole, because banking has historically been their main industry. And when you have problems in your main industry, you know, it’s kind of like Texas back in the 70s, when, when oil prices collapsed, I guess, technically, in the, in the, in the early 80s, when oil prices collapsed, it was really bad for Texas, because that was a mainstay of their economy. You’re looking at a similar situation with banking in Switzerland. So they, they’ve really got to try to make sure that this doesn’t, you know, there’s no contagion to this banking issue with other banks in Switzerland.
SIMONE DEL ROSARIO: Yeah, and this is something else that really perked my ears a little bit. Keller Sutter said that it didn’t qualify under too big to fail, because it was like a liquidity issue, not a liability issue. But isn’t that what a lot of banks are facing right now?
HAL LAMBERT: What banks most people don’t realize this banks are inherently levered 10 to one. So you take in a deposit, and you loan it out to in lending. And that’s typically done at a 10 to one ratio. So all banks have that issue. So if you ever run on deposits, you don’t have the liquidity to pay your depositors. And this is all based on trust and the ability for, you know, the depositors to trust that the banks run well, and that they’re not going to have any loan problems. So you know, perhaps she’s right that there wasn’t a loan problem necessarily at Credit Suisse. There were certainly a management problem where they were losing, and have lost billions of dollars of equity. So when you do that you make depositors nervous, and they start pulling assets out and that’s exactly what happened. They were pulling, pulling assets out in a very large space that started in the fourth quarter of last year, and didn’t seem to be abating this year.
SIMONE DEL ROSARIO: Well, this conversation certainly isn’t going away. Hal Lambert, founder of Point Bridge Capital and former director at Credit Suisse thank you so much for giving us your thoughts today.
HAL LAMBERT: Thank you.