Swiss Federation’s Investment in UBS

We remember: The Swiss Federation and the Swiss National Bank (SNB) decided in October 2008 to save UBS – in reality it may have been UBS who decided that it was to be saved -by transfering USD 60 bln worth of toxic assets to a specially created SIV, named StabFund, to be handeled by the SNB. The Swiss Federation was to lend UBS an amount of CHF 6 bln in form of convertible debentures, to prop up UBS’s tier 1 capital.

The transfer of the toxic assets to the SNB StabFund was done in two tranches. The first of which was transfered in December 2008. The second tranche was transfered in April 2009. In total, assets worth USD 38.7 bln were transfered, according to the scond SNB press release above.
This part of the deal was financed by the SNB by issuing short-term debt in USD, as announced on Feb. 2 2008. I guess, this answers Edwards Feb. 2 question on Credit Writedown.

The approximate compositions of the assets transfered can be seen in a message to the shareholders who had to approve both the transfer of assets as well as the issuing of convertibel debentures to the Swiss Federation.

Here is the table from the message:

Composition of toxic UBS assets transfered to SNB

Composition of toxic UBS assets transfered to SNB

From the same message we can also learn the conditions for the convertible debentures. The term-sheet is as follows:

Convertible Debentures Time Sheet

Convertible Debentures Term Sheet

The 6 month lock-up period is expiring next Tuesday (June 9 2009). It will be interesting to watch what the Swiss government is going to do. It has already decided that there will be “no public discussion” as to wether the debentures are going to be held, sold or converted to shares, as this would all be “price relevant information”.

This is annoying and problematic for several reasons. The obvious reason is that the Swiss people, represented by the Swiss Parliament, are de-facto excluded from having any say in what happens with the money it provided, it is taxpayer money, after all.
The not so obvious problem with this is a possible conflict of interest situation the actors might have, or might be accused of due to the lack of transparency here.

First, the Swiss Federal Councillor for the Department of Finances, Hans-Rudolf Merz was elected to the Federal Council (the executive branch of the Swiss government) in 2003. Before that, he was from 1974 to 1977  Vice-President of the Wolfsberg Center, which happens to be the UBS management training and executive development center. All UBS managers go through this mill. So being a Vice-President of that facility gives you quite some possibility for personal contacts and for networking.
A first just-in-time lucky event for UBS.

Second, the chairman of the banks’ regulator (FINMA, formerly FBC), Eugen Haltiner, was a lifelong executive, member of the board and vice-president of UBS before being named by the Federal Council (i.e. Merz) to chair the Federal Banking Commission in 2006. We not that this came just in time to handle the crisis (which he didn’t see coming, of course).
Now, I call that a fortunate turn of events for UBS. Shortly before the crisis brakes, two key posts the Finance Department and the Bank Regulator is taken over by former UBS executives. A second just-in-time lucky event for UBS, I’d say.

But that is not all, it gets better still.

Third, the Swiss Federal Councillor for the Department of Justice, Christoph Blocher, was an UBS board member from 1981 to 1991 but was removed after falling out with the other members over strategy – he is a relentless proponent of ‘shareholder value’. From that he may still have an axe to grind with UBS. Luckily for them, he was not reelected as Swiss Councilor in 2007 and was replaced by someone else.
Another just-in-time lucky event in favor of UBS.

Please note that the Swiss Parliament elects the Federal Councillors in public elections. However that public part is purely for show, effect and posturing. The candidates are determined by secret negotiations behind closed doors. Accordingly, the event of a Swiss Councillor not being re-elected  by Parliament is a very rare one. Mostly they are confirmed until they either fade-away and retire, step-down when they decide they had had enough, or simply die.

Now, of course, I don’t want to imply anything improper happened here. I am just pointing out that, to me, this appears to be an extraordinary string of just-in-time lucky events for UBS.
The lack of transparency does certainly not help to explain what was happening here.