Later this week, UBS and Credit Suisse will declare they had losses last year of nearly 30 billion Swiss francs, the largest in Swiss history, the AFP reports. And all due to the subprime crisis that began in the U.S. (thank you Barney Frank and Chris Dodd — but that’s another post). Risk analysts, the canaries in these coal mines, foresaw and documented over-investment in U.S. mortgage-backed securities in a report to UBS in 2002, according to this article from last summer’s Telegraph.
Is this really recent news? No — there were several articles last summer and in October about the credit crunch on Swiss banks, and fears that they would collapse like Lehman Bros. UBS didn’t…yet. And why? They took warnings to heart — eventually — and did some smart selling of their “toxic assets” early last year. Good for them — oh if only banks around the world had done the same. But last year UBS relied on funding from the Swiss government, while Credit Suisse received funding from…Middle Eastern parties.
So, they may not collapse just yet, but we note that the Swiss government is not big enough to bail out the banks completely — together UBS and Credit Suisse have balance sheeets still worth 7 times the Swiss GDP. And with the price of oil plummeting, just how deep are the pockets of Middle Eastern investors? We wonder.
Those tempted to respond by regulating banks as much as possible (especially with meaningless political gestures like salary caps on executives), could end up causing more problems in the long term. Overreaction is often the worst reaction.