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Sensemaker: Swiss tank

Sensemaker: Swiss tank

What just happened

Long stories short

  • Putin welcomed his “dear friend” Xi Jinping to Moscow as Japan’s prime minister visited Ukraine. 
  • A landmark review found London’s Metropolitan police to be institutionally racist, misogynistic and homophobic and incapable of policing itself. 
  • Martina Navratilova said she was in remission after being diagnosed with throat and breast cancers.

Swiss tank

Shares in UBS – the dominant player in a new Swiss banking behemoth that includes the rescued Credit Suisse – plunged and then recovered yesterday, signalling to world markets that the first big banking crisis of 2023 may, for now, have been contained. 

So what? Meltdown was averted. The half-dozen custodians of Swiss banking’s battered reputation who worked frantically through the weekend to merge the two institutions achieved their most urgent goal – a merger before Monday morning. 

But banking in general and Swiss banking in particular are being redefined in real time.

  • The past two weeks have shredded the idea that the sector has been fixed since 2008.
  • The question of whether banks exist to take risks and make money or be regulated as utilities to provide financial services and stability has to be asked all over again.
  • The answer is likely to be: the latter. 

Tens of thousands of high-paying jobs will go in the merger, many of them in London. More aftershocks will follow. Sunday’s deal was reached largely in secret and at unknowable cost to Switzerland’s status as a friend to the ultra-rich. The deal was forced through

  • without consulting Credit Suisse’s bondholders, including AT1 (additional tier 1) bondholders whose asset values were written down from $17 billion to zero;
  • without giving shareholders in either bank a vote; and
  • without letting the Swiss parliament vote on emergency legislation stripping those shareholders of a right to such a vote. 

All three groups are likely to demand redress if not a rewrite of the whole deal, starting at an investor call tomorrow.

Broader lessons from the crisis are meanwhile emerging:

All banks are, as the commentator Martin Wolf has put it, wards of the state, at the mercy of rate-setters since the value of their bond holdings falls as rates rise and those values have to be “marked to market”. Losses may be temporary and on paper only, but they have to be acknowledged – to regulators, central banks and governments forced into decisions on whether to intervene that are ultimately political.

US commercial banks are sitting on theoretical mark-to-market losses of around $2 trillion as a result of recent rate rises and that number would go on up if the Fed continued to prioritise taming inflation.

Eurozone banks are struggling even if they’re not failing: their average cost of capital (currently 9 per cent) exceeds their average return on investment last year (7.6 per cent). 

Swiss banks are geopolitical pawns (or players, depending on your view and the vagaries of history). In an extraordinary reconstruction of four days of intense negotiations leading up to the UBS-Credit Suisse buyout, the FT reports that the decision to favour shareholders over AT1 bondholders was taken after Credit Suisse’s three biggest investors – two Saudi, one from Qatar – let it be known they felt “extreme discomfort” over the opacity of the deal. In a letter to his opposite number at UBS, the CS chairman noted that these three shareholders also held big stakes in UBS, whose offer for the failing bank subsequently rose from $1 billion to $3.25 billion.

Did Switzerland look at its two biggest banks’ investor lists and do the Gulf a favour? It looks like that.

Credit Suisse was a disaster waiting to happen, reeling from its exposure to Archegos Capital Management (a $5.5 billion loss) and Greensill Capital ($1.7 billion) and from publication of leaked papers on 30,000 of its clients last year, some of whom turned out to have been beneficiaries of money laundering, drug trafficking and tax evasion.

“It’s been in every single banking scandal of the last decade and a half,” says one industry veteran. “Every time there’s been a problem, Credit Suisse has been right there. Anyone with any sense has already left.”

Who still banked with Credit Suisse? The leaked papers included details of more than a thousand account-holders in each of Venezuela, Egypt, Thailand and Ukraine. They may face more scrutiny from the new management. Whether UBS got a bargain for its $3.25 billion remains to be seen.


Dimon to the rescue
Thirty billion dollars in fresh deposits wasn’t enough to stabilise First Republic Bank, the second San Francisco-based bank to stare into the abyss since Silicon Valley Bank collapsed two weeks ago. The money was assembled last week by a group of bigger banks led by JP Morgan, according to a playbook established since the 2008 crash by which the industry looks after its own before turning to taxpayers for bailouts. But when markets opened yesterday First Republic’s shares fell hard, losing 47 per cent of their value in one day. This is not a collapse – yet. Instead the titans of Wall Street are having another go, possibly by converting that $30 billion into an equity investment. Person in the news: Jamie Dimon, the JP Morgan CEO, who’s getting used to being the grown-up in febrile situation rooms. He was already in charge when the bank bought Bear Stearns and Washington Mutual in 2008.


Meet dim Ernie
China has released its answer to ChatGPT – and it’s very well behaved. Ernie, a chat bot created by Chinese tech giant Baidu, is able to generate text and images – but when asked questions about Xi Jinping, the Tiananmen Square massacre, the treatment of the Uyghurs, or whether China should invade Taiwan, it says that it hasn’t yet learned how to answer the question, and sometimes suggests a change of subject. The research, carried out by Reuters, found that the bot gave similar reset responses when asked about US president Joe Biden and his predecessor, Donald Trump. The app disappointed investors when it was unveiled last Thursday, prompting Baidu’s shares to fall by up to 10 per cent.

The 100-year life health, education AND GOVERNMENT

Macron survives
A victory, of sorts. Emmanuel Macron’s government survived two votes of no-confidence in parliament yesterday, which means that his deeply unpopular pension reforms, including raising the retirement age from 62 to 64, will become law. The votes were triggered after Macron pushed through the bill without parliamentary approval – if either had succeeded, it would have sunk his government. Macron knows the reforms are necessary – France’s pension system costs nearly 14 per cent of its GDP, the third highest in the OECD – but he still has a fight on his hands. The outcome of the first vote was tighter than expected and took place as strike action disrupted flights, waste collection and refineries ahead of nationwide action on Thursday. Macron’s approval rating has fallen by four points in one month to 28 per cent, its lowest since the 2019 Gilets Jaunes protests. Macron is due to speak later today to outline what happens next. It may not be up to him. 

Our planet CLIMATE AND geopolitics

Gassed up
In the wake of Putin’s invasion of Ukraine, the US agreed to supply Europe with natural gas to help replace the Russian energy imports that much of the continent relied on. As a result, America’s liquefied natural gas (LNG) industry has boomed and the Gulf Coast in Texas and Louisiana – with its geographical and regulatory benefits – has become the prime target for development. Five terminals are being built or expanded in the area, with eight more approved and another eight proposed. If they all go ahead, America’s capacity to deliver natural gas would be doubled or even tripled, according to the Guardian, helping to nudge humanity over its emissions targets. Activists say that the war in Ukraine is a “false justification” for the increase in production. America’s average LNG exports this year are up by 14 per cent from 2022, and are expected to rise by a further 5 per cent in 2024.


Iran sanctions
Iran has committed its most serious human rights violations in four decades, Javaid Rehman, a UN-appointed expert, said yesterday, claiming that the “scale and gravity of the violations” committed by Iranian authorities during nationwide protests could amount to crimes against humanity. The protests started last September after the death in police custody of 22 year-old Mahsa Amini – in response to Tehran’s crushing repression of protesters, countries including the US and UK have imposed several rounds of sanctions. Yesterday, Britain sanctioned seven senior members of the Islamic Revolutionary Guard Corps (IRGC), while the EU targeted an additional eight individuals and an Iranian cultural centre. But both have held back from proscribing the IRGC as a terrorist organisation. Iranian activist Vahid Beheshti has spent the past 27 days on hunger strike outside the Foreign Office campaigning for the guards to be proscribed. 

Thanks for reading. Please tell your friends to sign up, send us ideas and let us know what you think. Email sensemaker@tortoisemedia.com.

Giles Whittell

Additional reporting by Jess Winch and James Wilson.

Photographs Getty Images

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