Can UBS make the most of finance’s deal of the century?

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Europe at last has a challenger for America’s behemoths

intensive”. That is how a regulatory filing described, with something approaching wry understatement, the few days of due diligence beforeannounced its deal to rescue Credit Suisse on March 19th. The acquisition was the first ever tie-up between two “global systemically important banks”, a designation introduced after the global financial crisis of 2007-09. Since it was announced, the pace has barely slowed.

Yet whereas gains from second-guessing political currents are uncertain, gains from keeping the business and making cuts are almost guaranteed. Assuming’s shears are sufficiently sharp, and 70% of Credit Suisse Schweiz’s costs can be chopped, separating the whole business would mean forgoing nearly a third of the deal’s total annual cost savings, according to Barclays, a bank.

Protection against losses from selling some of Credit Suisse’s assets is provided by the Swiss government. As part of the acquisition agreement, the authorities committed themselves to absorbing up to SFr9bn of losses, so long as the first SFr5bn are shouldered by. They are unlikely to have to cough up, however, given the relatively small pool of assets covered by the agreement. As a result,could move to end the agreement before it has wound down the portfolio.

Moreover, the loss guarantee fails to insure against the greatest danger when it comes to winding down an investment bank: that revenues plummet faster than costs, creating uncomfortable losses. Even excluding the sizeable cost of employees and one-off items, outgoings in Credit Suisse’s investment bank last year amounted to more than 60% of revenue. Many of these costs, such as the technology systems required to run a trading floor, will remain high even as assets are sold off.

 

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