Inside UBS’s takeover of Credit Suisse

This is an audio transcript of the Behind the Money podcast episode: ‘Inside UBS’s takeover of Credit Suisse’

Michela Tindera
It started with a simple question.

Interview clip
I’m wondering whether you would be open to assisting further if there was another call for additional liquidity from Credit Suisse.

Michela Tindera
That question was for the then chairman of Saudi National Bank, Ammar Alkhudairy. He sat down for a television interview on Wednesday, March 15th. Saudi National Bank had recently become the largest investor in the prestigious yet troubled bank Credit Suisse. And the FT’s banking editor, Stephen Morris, says a lot was riding on how he responded.

Ammar Alkhudairy
The answer is absolutely not.

Michela Tindera
This interview was taking place just a few days after Silicon Valley Bank failed and the entire global banking system had been put into question.

Stephen Morris
Those comments really set off a firestorm of media attention, client withdrawals, share price falling, its bonds plunging to trade at distressed levels. A lot of people, both inside and outside the bank, link these comments as being the proximate cause of Credit Suisse’s demise.

Michela Tindera
After these comments came out, things started to look so bad for Credit Suisse that it seemed like they could go bankrupt. And a Credit Suisse collapse could have been the tipping point for havoc in the entire global financial system.

Stephen Morris
If it goes bankrupt, we’ll have chaos in financial markets. It’s a huge bank with connections throughout the financial system, including to other banks, hedge funds, ordinary depositors. It would have been absolute carnage. So the stakes couldn’t really be higher.

Michela Tindera
So how did it avoid absolute carnage? Just look across town in Zurich to Credit Suisse’s top rival, UBS.

Stephen Morris
Well, if you’d asked me, I guess two months ago, if the Swiss would ever allow their two largest banks to merge, I would have said no.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re bringing you the inside story of how two Swiss banks and their government raced against the clock to avoid a global banking meltdown.

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UBS has been Credit Suisse’s closest rival for years, in more ways than one.

Stephen Morris
These two banks have sat there for centuries on the same square in the centre of Zurich called Paradeplatz. They’re both on different sides of the square, both looking out into the centre, kind of facing each other, but also kind of next to each other. The style of the buildings are very different. UBS’s has been redesigned and is sleek and modern and glass and metal, whereas Credit Suisse’s is much more old, grandiose architecture, small, narrow warren-like corridors and more old Switzerland than new.

Michela Tindera
UBS’s takeover of Credit Suisse is the culmination of a rivalry that’s existed for a long time. But well before UBS would eventually rescue Credit Suisse, things looked quite different. Let me take you back about 15 years, back to the beginning of the global financial crisis, where a lot of the stories on this show have their origins.

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So it’s 2008 and UBS is in some hot water.

Stephen Morris
UBS was the bad boy of Swiss banking.

Michela Tindera
At the time, UBS is Switzerland’s largest bank. And essentially it’s a mess. It’s posting big losses and writedowns. Investors are losing confidence, and Switzerland’s reputation as a banking haven is taking a hit. That all comes to a head in October 2008.

Stephen Morris
It had to be bailed out by the government.

Michela Tindera
The Swiss government pumps billions into the bank to help recapitalise it, and that makes Swiss taxpayers very unhappy. Meanwhile, UBS’s rival Credit Suisse makes it out alive, receiving new capital from private investors instead of the government.

Stephen Morris
Credit Suisse survived. Credit Suisse was the good one.

Michela Tindera
So 2008 comes and goes and UBS has a lot of work to do to get back on track.

Stephen Morris
UBS learnt some very hard lessons, removed all of its management, largely shut down the trading and risky operations of its investment bank, focused on wealth management and then spent the best part of the next, I would say, five to 10 years cleaning up scandals, overturning the risk culture of the group and generally trying to amend for the wrongs that it had done to Swiss citizens and Switzerland’s reputation as a country.

Michela Tindera
UBS emerged from the financial crisis humbled. And Credit Suisse may have seemed untouchable, but Stephen says there’s an often used maxim in finance that would foreshadow the events to come.

Stephen Morris
If you wanna look at the banks that will get into trouble in the next crisis, it’s not gonna be the ones that failed in the last one. It’s gonna be the ones that didn’t and weren’t forced to make, you know, tough changes and perhaps got a little bit overconfident.

Michela Tindera
And fast forward to 2023. Now, these two rivals have swapped places.

Stephen Morris
UBS has largely repaired itself. Its share price is good. Its leadership is stable. Its strategy is generally liked by the market. And Credit Suisse is the basketcase, with a new scandal coming out every week damaging its reputation.

Michela Tindera
Late last year on the show, I talked with the FT’s European banking correspondent, Owen Walker, about a lot of Credit Suisse’s troubles. During that episode, Owen outlined the bank’s latest gameplan. It included things like severe cost-cutting and selling off its investment banking division. But that plan crashed and burned.

Stephen Morris
It wasn’t enough. It wasn’t convincing enough in terms of a change in strategy, and it wasn’t executed fast enough. Credit Suisse has had, I think now, three restructuring plans in the last two years and I think seven in the last decade. So very few of their restructuring plans have ever actually worked and turned the bank around and turned it into a profitable, well-run, honourable institution.

Michela Tindera
Credit Suisse was facing a crisis of confidence. Even so, it did manage to get an infusion of money from a big new investor late last year.

Stephen Morris
The Saudi National Bank — very deep pocketed, strong links to the state. And it was intended to be a new cornerstone investor to take out all those people shorting its stock and to back them.

Michela Tindera
So the bank had some reprieve going into this year. But just a few months in, Silicon Valley Bank collapses.

Stephen Morris
And that puts the whole market on edge. So Credit Suisse at this point is fragile. It can’t afford any more mis-steps.

Michela Tindera
And then Credit Suisse starts to have this PR issue with the then chairman of the Saudi National Bank.

Stephen Morris
He goes on television at Saudi Arabia’s big financials conference and is asked by a journalist, if Credit Suisse needs any more capital, considering the market jitters, would you put any more in? And he answers, “Absolutely not.” 

Michela Tindera
That’s the clip from March 15th that you heard at the beginning of the episode.

Stephen Morris
He then does go on to qualify and talk about regulatory reasons, and says he doesn’t think Credit Suisse needs any more capital. But that is the kind of snapshot that everyone, journalists around the world report.

Michela Tindera
So suddenly in the middle of all this banking chaos, it looks like Credit Suisse’s biggest shareholder isn’t backing it.

Stephen Morris
And that, I think, really is the catalyst for clients to lose even more faith.

Michela Tindera
After that interview airs on Wednesday, things turn from bad to worse.

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Credit Suisse appears to be the latest on the brink . . . 

News clip
Shares in Credit Suisse plunged to a record low, falling 24 per cent.

Michela Tindera
It’s all happening really fast — so fast that the very same day the Swiss central bank decides it needs to step in to prevent a catastrophe. So the top execs at Credit Suisse — that’s Ulrich Körner, the CEO, and Axel Lehmann, the chairman — are summoned to the country’s central bank.

Stephen Morris
And they were told that they were gonna be getting this liquidity line, which they’d been lobbying for, which they thought was great.

Michela Tindera
That liquidity line was SFr50bn. So maybe Credit Suisse is out of the woods after all?

Stephen Morris
But however, in the same meeting, the central bank delivered a very different message, which a person who was involved remembers, told the FT: You will merge with UBS and you will announce this on Sunday evening before the Asian market opens. And this is not optional. So they were given an ultimatum. This credit line was not to save Credit Suisse. It was to stave off bankruptcy until the weekend so they could merge with UBS.

Michela Tindera
Wow. So let’s recap here. Essentially what’s just happened is the central bank, along with the regulator Finma and the country’s finance minister, have given Credit Suisse this deadline. The bank has just four days — Thursday, Friday, Saturday and Sunday — to work out a deal to merge with its top rival before Asian markets open on Monday.

Stephen Morris
The stakes are incredibly high because over the previous weekend, Silicon Valley Bank has to be saved by a combination of US regulators and private companies. Now we’re going into another weekend with a much larger, globally systemic financial institution, as Credit Suisse is known, could potentially go bankrupt.

Michela Tindera
So what happened next? So Credit Suisse knows that they have to merge with UBS. Does UBS know this?

Stephen Morris
UBS doesn’t know this yet, but they have their suspicions. The chairman of UBS is a very interesting character, a guy called Colm Kelleher — Irish, but very American in his outlook. He’s an irascible character. Yeah, very smart and very well thought of in global markets. And he has been preparing behind the scenes for an emergency 9-1-1 call from the regulators to save Credit Suisse. They kind of had an inkling that this might happen. But on Wednesday, when the credit line was given, they didn’t know anything about it yet.

The first Colm Kelleher ever found out about it was at 4pm on Thursday, the following day, when he was instructed that the government and regulators and central bank wanted UBS to come up with a plan for Credit Suisse. And that’s really when everything started to accelerate.

Michela Tindera
OK, but does UBS even want this deal? Do they have any say in this?

Stephen Morris
UBS has been steadfast in its position that it does not want to merge with Credit Suisse. It has its own plan. It’s doing quite well. And they don’t want any part of what they think is a quite rancid culture over at Credit Suisse. But ultimately, when your government comes to you and says, we want you to do this, you have limited room for manoeuvre. So UBS sets about trying to get itself the best deal it can and the deal that protects it and its shareholders from any of the toxicity that might come across from Credit Suisse as part of it.

Michela Tindera
So the banks both hire advisers to help them get a good deal. But keep in mind that they’re trying to keep things quiet. And that means code names.

Stephen Morris
So UBS, they came up with two code names based around trees. Credit Suisse was Cedar, and UBS was Ulmus, which is the Latin word for an elm tree. And on the other side, Credit Suisse came up with lake-based monikers for each part of the deal. Credit Suisse called itself Como after Lake Como, and UBS was Geneva after the, obviously the lake in Switzerland. Obviously, this didn’t do much for keeping the deal secret because the Financial Times managed to find out about most of it as it was happening.

Michela Tindera
So by Friday morning . . . 

Stephen Morris
Both sides are working with their code names on the different facets of the deal. UBS isn’t really talking to Credit Suisse. As far as it’s concerned, it’s negotiating with the government and the central bank and the regulators. It’s not interested in talking to executives at Credit Suisse that have lost control of their own destiny at this point. They have no power. This is incredibly frustrating for Credit Suisse, of course, because as far as they’re concerned, a few days ago, they were executives in charge of one of the world’s largest and most prestigious banks.

Michela Tindera
Now, the deadline for this merger is a mere two days away. And UBS is trying to squeeze all it can from this deal.

Stephen Morris
UBS is gonna wanna pay the least it possibly can for its rival, and it’s gonna want to secure the maximum amount of government support, both in terms of liquidity lines, but also guarantees and indemnities for what they might find at Credit Suisse because, remember, 72 hours is not a long time to look at a massive global financial institution and conclude what it’s worth and if there are any unexploded bombs there on the balance sheet, which could come back to haunt them. And we’ve seen this in financial crises in the past. And they also want the government to help cover some of the potential losses because winding down big banks like this is very expensive. You have to decommission IT systems, you have to compensate clients, you have to pay off staff with redundancy when you fire them. So it’s locked in negotiations with the government saying, OK, we’re the only option to save Credit Suisse, this is what we need to do it.

Michela Tindera
The FT also finds out that asset management firm BlackRock is considering ways to carve up Credit Suisse. But almost as soon as BlackRock’s planes touch down in Zurich . . . 

Stephen Morris
BlackRock gets a pretty severe message from the Swiss establishment saying: we want a Swiss solution to this. We do not want a foreign firm coming in and carving up one of our national icons. So thank you very much for your interest, but we will be sorting this out ourselves. So BlackRock, pack up and fly out.

Michela Tindera
While this is happening on Friday, Stephen and some of our colleagues have been keeping tabs with their sources.

Stephen Morris
I think it was around 9.15pm, we put out a story saying UBS is in talks to take over the whole of Credit Suisse. This isn’t just one or two units. This isn’t a partnership. This is a full-scale takeover. The world has suspected that this is happening, but it’s the first time anyone’s confirmed this. And obviously the two banks retreat further into their war rooms and work all night on this.

Michela Tindera
Which brings us to Saturday. Less than 48 hours until markets in Asia open and still, there’s no deal.

Stephen Morris
UBS still really isn’t talking to Credit Suisse.

Michela Tindera
And on top of this, the Swiss government is feeling pressure from around the world.

Stephen Morris
When a global financial institution gets into stress, there are a lot of other parties that are interested as well. Credit Suisse has big operations in New York and around the US, in London, in Singapore, and everybody around the world wants to make sure that their little part of the bank is protected if there is a bankruptcy. Janet Yellen over in the US, Sam Woods, Andrew Bailey at the Bank of England, Andrea Enria at the European Central Bank — they do not want a bank to collapse. In fact, one of our sources described them as kicking the shit out of the Swiss to act as quickly as they could because it was gonna become much bigger than one bank in Switzerland very quickly if there was a failure, because as we know, fear or lack of confidence spreads very quickly in financial markets and it could have caused — the word is contagion — it could have caused a much, much larger crisis dragging down several other weaker banks in the US and around Europe.

Michela Tindera
So the Swiss government knows what they have to do. But Stephen says they have another obstacle to clear.

Stephen Morris
We’ve also found out that the Swiss government is planning to pass legislation to essentially sidestep the normal six-week consultation period and vote for shareholders of both companies. They need to get this done by the end of the weekend and they can’t risk shareholders not voting for it. So they’re actually changing the laws of the whole country to allow them to force through this deal without a proper shareholder vote. And that was and is very controversial.

Michela Tindera
So UBS is still deliberating on a deal, but without really talking to Credit Suisse. BlackRock has come and gone. Officials in other countries are throwing in their two cents. And the Swiss government is even trying to change its laws to meet this Sunday deadline. But at this point, with only hours left, an offer price hasn’t even been mentioned.

Stephen Morris
The first time a price is actually mentioned, Colm Kelleher comes out of a dinner in Zurich on Saturday night and he calls his counterpart at Credit Suisse to inform him that UBS was gonna offer $1bn in total in stock for the whole group.

Michela Tindera
That offer would have meant that one Credit Suisse share was worth about SFr0.25. Now, keep in mind that even after the rocky week that the bank had just gone through, its share price was SFr1.86 when the markets closed. So this is a low offer, to say the least.

Stephen Morris
Credit Suisse is obviously outraged by this, both in terms of the financial terms, but also it’s kind of an insult as well. Initially, UBS says that’s our offer, take it or leave it.

Michela Tindera
Sunday morning, Stephen and our colleagues published a story that reveals UBS’s $1bn offer.

What was the reaction at the time when that story came out?

Stephen Morris
Well, the reaction first was disbelief at the low level of the price, especially with the government changing the laws of the country at the same time giving UBS all this kind of indemnity. So we’re wondering at this point if this gets done. I mean, is this just too punchy an offer from UBS to ever be accepted? And are we starting to think about a nationalisation of Credit Suisse instead? We subsequently learned that was never on the cards.

Michela Tindera
But essentially, after this $1bn offer comes out, the Swiss central bank, the national regulator Finma and the Swiss finance minister call Credit Suisse and say . . . 

Stephen Morris
You will sign this deal or we will remove you (chuckle) because we’ve already changed the law of the country. We will remove you as board members, install people that will sign off the deal and you will kind of be a national disgrace. It then goes back to UBS and says, OK, we know that you’re not in trouble. We know that you don’t want this, but you can’t offer 1bn. That’s just too low.

Michela Tindera
So UBS doubles their offer to 2bn, and that’s still too low for Credit Suisse to accept. And again, the clock is ticking. But going into Sunday evening . . .

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Stephen Morris
We hear that this is signed. This is now a done deal. The price has been increased to $3.25bn, about SFr3bn. Essentially, UBS is taking over the whole thing. They’re just gonna swallow the whole thing and sort it out over the next few years.

Michela Tindera
Sunday night, there’s a press conference in Bern, Switzerland. The chairs of UBS and Credit Suisse, the country’s finance minister and other regulators attend, and together they announce the deal.

Here’s UBS chair Colm Kelleher:

Colm Kelleher
This transaction supports financial stability in Switzerland and creates significant sustainable value for UBS shareholders. Combining the best of Credit Suisse with our strategy and culture will help these businesses flourish. I am pleased that this transaction will bring the long desired stability for the Credit Suisse client base.

Stephen Morris
The chairman of UBS is very blunt and says there’s no two ways about it — this is a rescue of Credit Suisse.

Michela Tindera
And this is what Swiss finance minister Karin Keller-Sutter has to say.

Karin Keller-Sutter
I have to say that very clearly, this is no bailout. This is a commercial solution.

Stephen Morris
The Swiss are very preoccupied with telling everyone this is not a bailout. This is a commercial deal that has been worked out between two companies in the private sector. Because remember, memories of the 2008 government bailout of UBS are still very fresh among the populace. But I would say the overriding emotion at that press conference is just relief at this point, because I’ve said before, if a big bank like that goes down, both in terms of real financial terms but also confidence in the markets would have been shattered and Monday morning could have been carnage. And remember, on the other side of the Atlantic, there are two more US banks potentially going bankrupt and trying to be rescued by their larger peers. So this is not, this is not happening in a vacuum. This is happening in the context of a lot of global panic about the stability of various banking systems in different countries.

Michela Tindera
So on Monday, when markets open . . . 

News clip
It has been a day of volatility on the global markets following that unprecedented historic banking deal. Now, there were sharp losses in early trading in Asia and Europe, although banking stocks have since rebounded.

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UBS stocks fell by up to 13 per cent earlier in the day, but they have rallied and they were up by 1.3 per cent at the time of closing.

Stephen Morris
Basically, there isn’t this huge ripple effect through financial markets. The last-ditch intervention by the Swiss has actually worked. Credit Suisse isn’t gonna go bankrupt. The clients aren’t gonna lose all of their money. Taxpayers don’t have to contribute. And the global investment banking system isn’t gonna have this big contagion effect through. So actually, it was much better than I personally was thinking. I was bracing for another 24-hour day.

Michela Tindera
So, Stephen, now that the dust is settled a little bit, where does this leave UBS?

Stephen Morris
It’s kind of strange, you know, because Credit Suisse both does and doesn’t exist. UBS does not own it yet. It’ll take, I think, between two to four months to fully clear everything and for them to take control. And because when you have 72 but really in 48 hours to make a decision about something, you haven’t decided. So I don’t think UBS knows what it’s gonna do with the Credit Suisse brand. Will it retire it completely in disgrace? Or will it try and revive it in some way? I don’t think it knows what it’s gonna do. I mean, there’s still a lot of stuff for them to kind of work through in the coming weeks.

Michela Tindera
And what about Credit Suisse?

Stephen Morris
Credit Suisse sent a memo to staff saying, you have to come into the office and we will continue to pay you. The Swiss government then did pass legislation saying no more bonuses for Credit Suisse, which I think was unavoidable in the context of the public anger. There have been protests outside Credit Suisse’s office in the centre of Zurich, for example. So it’s in a limbo at the moment. But, you know, as of today, I imagine Axel Lehmann is, you know, sat and probably quite sad in his office on Paradeplatz Square and as is the CEO Ulrich Körner who didn’t even get to be a year in charge before his bank collapsed, and presumably he’ll lose his job.

Michela Tindera
What do you think this means for the banking industry at large now that these two banks have merged?

Stephen Morris
We don’t know yet. But when you have a big deal like this, that does change the European and global banking landscape. It’s almost like a domino. It can set off an effect where other banks will say, oh, well, a large deal like that is actually possible and can be very advantageous for whoever the buyer is. Maybe we should dust off some of our domestic and cross-border acquisition plans and have a look at them again because they might actually work.

It also changes the competitive landscape. You’re now looking at a much larger bank, especially when all the problems have been sorted out in a couple of years that will be better able to compete and take market share from its rivals. So I’m sure the management teams of their rivals will be looking at what maybe they can do to get bigger in one sort of, as they say, inorganically, not just growing cells, but by buying something else. But that all very much remains to be seen. I mean, Switzerland is a unique country for many reasons, and its banking system is not part of the EU. It’s very different to the UK as well. So it may be that this is just an idiosyncratic rescue of a good bank of a very, very bad one. But certainly it does change the landscape. And we’re gonna have a lot of interesting situations, I think, to cover over the next two to three years.

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Michela Tindera
Behind The Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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