Friday, October 17, 2008

Swiss Citizens must be worried

Swiss to fund $60bn ‘bad bank’ for UBS

The Swiss economy is very vulnerable to a UBS default.

Posted by mountain goat @ 01:17 PM (1074 views)
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13 thoughts on “Swiss Citizens must be worried

  • mountain goat says:

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  • That’s an interesting graph, mg. Seems like even the ultra-conservative Swiss caught the greed bug. If this is an illustration of anything, it’s that globalization means globalization of problems as well and no-one is immune.
    As a thought, as far as I know, there can be no free market in globalization as we know it – Smith’s entire model and his ‘invisible hand’ concept was based on ‘internationalization’ – distinct nations trading with each other, as partners, as opposed to globalization which involves global corporations trading across borders.

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  • mountain goat says:

    Shipbuilder – “If this is an illustration of anything, it’s that globalization means globalization of problems as well and no-one is immune.”

    I went to a talk by Nobel prize winner Joe Stiglitz. He said “Wall Street’s main philosophy has been that there is a fool born every minute. Globalisation to them has meant a bigger pool of fools to exploit!”

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  • mark wadsworth says:

    Boy have they been had!

    Just look at UBS last balance sheet!!!

    Total ‘assets’ CHF 2,077 billion
    Total liablities CHF 2,025 billion
    by subtraction, own capital CHF 52 billion

    Zoom in on actual debt finance, CHF 207 billion, er, 2.5% of total assets.

    They’ve asked for about CHF 50 billion in handouts … this looks like a job for “Debt-for-equity-swap-Man”. UBS should be foreced, rather shamefacedly, to tell their bond holders that each CHF1 debt is henceforth being replaced with CHF 0.75 with new shares of CHF 0.25 to balance.

    That’s that fixed.

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  • mark wadsworth says:

    Oops, the 2.5% relates to equity, debt finance is 10% of total assets.

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  • Please could anyone who understands the meaning of these things explain to me the relevance of this number of T-bills being issued? I’m none too sure how T-bills work. Is this inflationary? Or is it just the transfer of paper [email protected] from the banks to the tax payer – and no new money is being printed? Or do other countries buy them? If so, what do they use to pay for them with?

    Whatever, it’s an impressive graph. I’m sure it must mean something!

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  • Save the Swiss – buy a clock.

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  • mountain goat says:

    Cornishman – yesterday I read a pretty technical article about this which I did not fully understand (can’t give you ref right now it at home). However, the bottom line was that the Fed has definitely changed course. Up till the past few weeks all new money generated was “sterilised”, which means matching collateral was taken on. But in the past few weeks this has become decoupled and money has simply been “printed” and not sterilised. This probably because they are now afraid of deflation and are throwing everything they have against it.

    S2R2 posted this plot a few days ago

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  • thanks mg. A recent change of tack by the FED would perhaps explain the recent ramping up on my graph,

    I’m still none too sure about whether the printed money in just equalises the old ‘pretend’ money that is being written off as firms go bust and so is not going to be inflationary. Or whether the fact that the written off money has already been spent once means it can’t be taken out of the reckoning.

    No doubt we’ll all find out soon enough which way this is going to go.

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  • mark wadsworth says:

    @ Cornishman, good question.

    The best comparable example I can think of is after German reunification in 1990. DDR Marks (market value DM 0.1) were swapped for DM 1-to-1. This was great for East German savers, but terrible for East German companies with debts, as the value of those debts went up ten-dolf. Result? Massive wave of bankruptcies in the East (from which they still haven’t recovered) and, by German standards, very high inflation and very high interest rates.

    So I think that your second assumption must be correct.

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  • RE: MountainGoat Post 3. I believe Joe* was spot on mate.

    * No, not Plumber Joe.

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  • mountain goat says:

    I think a few $ billion of unsecured money is the least of the Fed’s worries. Deflation has to be fought desperately because it will rapidly lead to bankruptcies which will unleash derivative disaster. For the Fed, the failure of another large financial firm like Lehmans needs to be avoided at all costs. In fact any large firm going bust could cause derivative problems. Read this on FT Alphaville from Tony Maude of Dresdner :

    ” According to the quarterly review of the BIS, in September, the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling $596 Trillion as of December 2007.
    That splits out $393 Trillion in interest rate derivatives, $58 Trillion in credit default swaps, $56 Trillion in currency derivatives, oh and $71 Trillion of unallocated derivatives.
    Derivatives are, in my book, leveraged exposures. This is another accident just waiting to happen.

    In a perfect world, long and short derivatives should net each other out leaving only a fraction of risk. As we know this world is far from perfect.
    The BIS tries to assess this net risk and have come up with two figures. $14.5 Trillion in gross market value and $3.256 Trillion in gross credit exposure.

    We are talking Trillions here. A net risk of $14 Trillion compares with the annual GDP of the USA. Consider a disorderly unwinding of this market that is roughly 12 times the size of the global economy. This pool of silent derivatives can suddenly come to life any day with the failure of a multinational financial firm.”

    The Fed, the BoE and ECB will print and print because financial firm bankruptcies are going to unleash this monster. Inflation is the last thing on their minds at this point. But it will be in the future.

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  • European-bear says:

    It is true that UBS is one of the weakest Swiss Banks at the moment. But it is all a relative thing. Switzerland has always demanded a hight tier 1 capital ratio in its banks than other countries. UBS has only about an 11% tier 1 capital…much less than the 15% or more of other Swiss banks. But compare that to the strongest UK bank (HSBC) of about 8%, Barclays Lloys TSB about 6.5% and RBS of just 4% (it is why RBS is in such trouble).

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