One of the biggest focuses of worry has been UBS, which is highly levered even by investment banking standards, a major derivatives player, and widely seen as too big for the Swiss government to rescue.
The measures announced before the opening of the market in Europe are clearly hopes to put doubts about the Swiss giant to rest. But will they be sufficient? From the Wall Street Journal:
Swiss banking giant UBS AG (UBS) said Thursday it will raise CHF6 billion of new capital through mandatory convertible notes, fully placed with Swiss ConfederationThe Swiss National Bank (SNB) and UBS have reached an agreement to transfer up to USD 60 billion of currently illiquid securities and other assets from UBS’s balance sheet to a separate fund entity.
With this transaction, UBS caps future potential losses from these assets, secures their long-term funding, reduces its risk-weighted assets, and materially de-risks and reduces its balance sheet.
This transaction allows the SNB and shareholders of UBS to participate in the recovery potential of the entity’s assets once the loan is fully repaid.
The solution significantly reduces the uncertainty for UBS shareholders and clients and contributes to the stability of the financial system by ensuring an orderly sale of these assets.
The fund will be capitalized with up to USD 6 billion of equity capital provided by UBS and a non-recourse loan in the maximum amount of USD 54 billion provided to the fund by the SNB. The entity will be controlled by the SNB. UBS will sell its equity interests to SNB for USD 1 and will have an option to repurchase the equity once the loan is fully repaid for a purchase price of USD 1 billion plus half of the equity value exceeding USD 1 billion.
To fund its equity contribution, and at the same time maintain its strong capital position, UBS can raise CHF6 billion of new capital in the form of mandatory convertible notes (MCN). The MCN has been fully placed with the Swiss Confederation.
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It’s a game of hot potato:
U.S. hedge funds urged the Bank of England to step in and free the $65 billion of Lehman Brothers Holdings Inc. assets frozen in London, the Financial Times reported, citing a letter from Richard Baker, the chief executive officer of the U.S. Managed Funds Association.