A fairytale ending to the financial crisis: too good to be true?

There are many winners in the successful sale of Switzerland's stake in UBS:  the State, the bank, its shareholders and the advisors to the transaction.

Less than a year ago UBS woes seemed nearly insuperable, and along with its largest bank the whole Swiss Inc. seemed to be in trouble.

UBS was not only the European bank with the heaviest sub-prime related losses but it was also on the forefront of the legal battle with the US tax authorities. The largest private bank in the world (at the time), it was also the bank which had the most to lose as clients started to flee from an institution where the problems of the investment bank could put the whole group at risk. The problems of its largest institutions where weighing heavily on Switzerland a country where the banks’ asset amount to more than 8 times the GDP, and who unlike Ireland was standing alone without the backing of the EU.

 

In that context there are many reasons to cheer the recent sale of the stake of Switzerland in UBS for a profit of more than CHF 1bn.

The State, i.e. taxpayers made a shrewd investment. UBS is now fully independent again and there is no fear that government intervention could hinder its competitiveness on the global markets. Shareholders have cheered the sale and the stock is now 17% (CHF 19.41 as of 28/08/09 vs. 16.50) higher than the selling price. And let’s not forget the three advisers to the Swiss government, Morgan Stanley, Credit Suisse and UBS itself who shared 50mio USD in fees.

 

The UBS case forebodes well for other countries who have invested heavily into their banking system at the peak of crisis.

It suddenly looks like governments, by acting like saviors have in fact made very shrewd investments by buying at the bottom. They now stand ready to benefit from it along with the likes of Warren Buffett (who on 28/08/09 is up 42% on his purchase of Goldman Sachs shares at $115).

Yet in Europe at least, most countries seem either unable or unwilling to do so.

The UK who could not sell its stake at once because it had to de facto nationalize some institutions (RBS, Northern Rock), thus engaging into a more complex unwinding process. In addition fears about the solidity of the system means that a rushed sale (or perceived as such) could be catastrophic.

Others, like France, could offload their stake much easier but are unwilling to do so because the stake is not only meant to save the banking system but also to control it. Combined with regulatory changes, ownership is the most efficient way to make changes in the governance of banks and their risk appetite: two factors generally seen as playing a major role for leading the system into the crisis.

 

Finally, every crisis is a reminder that it is sound to exercise extra caution when things seem to go too well. Trying to have a critical point of view on the UBS sale we can note, firstly, that Switzerland is exiting at a profit from a company that is still losing money (losses of 1.4bn CHF for the second quarter) and, more worryingly, that private clients are fleeing. Secondly, the Swiss economy is so reliant on its banking system which is concentrated on its too giants (UBS and Credit Suisse account for more than 70%). Therefore Switzerland will remain an important stakeholder in UBS as the interests of Swiss Inc. and its banks are inextricably in line. However as it is no longer a shareholder in UBS, it will bear plenty of responsibility but without a voting right.

To top it up, in the long run, the risk of moral hazard linked to the state intervention is reinforced by the fact that the State can benefit from it. If intervention is not a plague but a bonanza for all involved then a financial crisis does not appear so scary any more.

 

Nevertheless doomsayers should not spoil the recovery party. The offload of stakes in bank at a profit could bring a solution to the puzzle that governments had to solve when rescuing the banking system: the “socialization of losses and privatization of profits”. From saviors of financial institutions seen as “guilty” for the crisis, they become winners which is much more acceptable for taxpayers. Yet, governments who are enjoying great short term profits themselves might find it harder to tell the financial world that it should no longer be guided by short term profits.