Swiss bank UBS fell victim to its high-risk strategy of expansion in the US market when the financial crisis erupted ten years ago. But the Swiss government and central bank’s plan to bail out UBS was not only successful, but profitable too.
"We are not surprised by the development of the financial markets in recent weeks, but we have been surprised by the speed in which the crisis has deteriorated,” said the then Swiss president Pascal Couchepin. In his address to the media on October 16, 2008 Couchepin outlined the measures taken by the government and the Swiss National Bank (SNB) to rescue the largest Swiss bank.
The tension in the press room was palpable. After the grounding in 2001 of Swissair, a national icon, Switzerland was in danger of losing another flagship company.
This time, the consequences would have been far more dramatic. In Switzerland alone, the collapse of UBS would have threatened the savings of one million private customers and the current accounts of 300,000 companies. Along with Credit Suisse, the banking giant held 60% of the market for loans to small- and medium-sized enterprises in Switzerland.
High risk strategy
UBS’s expansion strategy in the US, particularly in the investment banking sector, had led to record profits in 2005 and 2006. But when the mortgage crisis broke out, UBS became the most exposed foreign bank on the US real estate funds and derivatives market.
The collapse of Lehman Brothers a month earlier had led to the near freezing of the market for interbank loans. UBS, the world's largest asset manager, found itself without liquidity and a mountain of illiquid securities, having already wiped $40 billion of assets in the subprime crisis.
On October 16, the government and SNB outlined their aid plan: CHF6 billion ($6.09 billion) from the state to restore the bank's own funds and $54 billion from the central bank to allow UBS to transfer the illiquid securities into a special stability fund – a bad bank, while waiting for better times to sell them back. These securities were parked in a "special purpose vehicle" set up by the SNB in the Cayman Islands.
President of the National Bank, Jean-Pierre Roth, explained that it was the SNB’s duty to contribute to the stability of the Swiss financial system, saying this was why it had agreed to take over UBS’s toxic assets.
Roth was quickly proven right. In the space of a few years, the SNB freed itself from the illiquid securities of UBS and even came out CHF5 billion better off; the federal government, too, earned CHF1.2 billion thanks to an interest rate of 12.5% that it applied to the loan granted to the bank.
UBS closed 2008 with a deficit of CHF20 billion, the largest loss ever recorded by a Swiss company. But the worst had been avoided. However, UBS's troubles in the US were not over: only a few months later, the bank was under investigation for helping tens of thousands of American clients evade taxes. In 2009, the government had to intervene a second time, agreeing to provide the American authorities with the names and data of thousands of clients suspected of tax evasion. This would mark the beginning of the end of Swiss banking secrecy.