POP QUIZ

The huge Swiss bank, Credit Suisse, was riddled with mismanagement for years — how much has it paid in fines since 2000? (Scroll to the end for the answer)

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CHART OF THE DAY

IN THE NEWS

🏦UBS Completes Credit Suisse Takeover to Become Wealth Management Titan (Reuters)

 

On Monday, the Swiss banking giant, UBS, finalized its emergency takeover of former competitor, Credit Suisse, marking the most significant banking merger since the 2008 financial crisis.

The acquisition brings a close to Credit Suisse’s 167-year journey as an independent entity and establishes a new banking titan in global wealth management with a balance sheet of roughly $1.6trillion.

• “This is the start of a new chapter – for UBS, Switzerland as a financial center, and the global financial industry,” per an open letter from UBS in Swiss newspapers.
• With oversight of $5 trillion in assets under management, the deal solidifies UBS’s position as the world’s largest wealth manager.

UBS managed to finalize the large-scale deal in about three months. On March 19, UBS offered to acquire its distressed rival for a bargain price of roughly $3.2 billion—a 99% discount from Credit Suisse’s peak value (we outlined the deal here previously).

• Engineered by Swiss authorities, the deal helped mitigate a collapseincustomer trust that risked pushing Credit Suisse over the brink.

Regulators maintain that intervention was crucial for safeguarding Switzerland’s reputation as a financial hub, which would be at risk if Credit Suisse’s downfall instigated a more extensive banking crisis.

• Said differently, allowing Credit Suisse to implode would’ve likely spurred deposit runs at other banks, posing a disastrous risk to the whole private banking industry at a particularly vulnerable time after Silicon Valley Bank’s (SVB) high-profile failure in March, too.

Why it matters:

With 120,000employeesglobally, the merged banks are planning 20-30% workforce job cuts. And out of the 160 announced leadership positions for the combined bank, only a fifth will be filled by individuals from Credit Suisse.

Relations aren’t exactly off to a hot start, a reminder that the merger is more of a shotgun wedding than a true partnership: The Financial Times reports that UBS executives have drawn up nearly two dozen “red lines” prohibiting Credit Suisse staff from various activities.

• These include taking on clients from “high-risk” countries like Russia and Venezuela, new product launches without approval from UBS managers, and limits meant to prevent money laundering, with UBS’s chairman warning, “We are worried about ‘cultural contamination’” from the merger.

Still, UBS’s CEO suggested he has no doubt this acquisition will be successfully executed, but he warned the coming months would be "bumpy" as UBS gets on with absorbing Credit Suisse, which might take three to five years.

• Of course, having up to $10 billion in losses from the merger insured by the Swiss government to push the deal through also helps ease concerns.

 

😅 Meredith Whitney: ‘There Will Be Many Fewer Banks’ (FT)

 

It’s been three months since SVB’s collapse, and we could be talking about regional bank uncertainty for a lot longer. Enter Meredith Whitney, who became a household name on Wall Street 15 years ago. The "Oracle of Wall Street" is credited for calling the Great Financial Crisis.

Now, she's relaunching her firm as she predicts many regional banks will disappear, thanks largely to the U.S. housing market and bank regulation.

• “There are good reasons investors don’t want to be in bank stocks right now,” Whitney told the Financial Times. “There will bemany fewer banks.”

In recent reports, Whitney’s research firm anticipates more mergers and acquisitions should certain regional bank stocks continue falling.

• “There are a lot of headwinds facing the regional banks right now,” Whitney said. “Just don’t know the type of loan pressure they are going to be under and also the capital requirements they may face.”

Other strategists and economists generally echo Whitney's view. Many believe that while the worst of the banking industry's woes this year might be over, the distress could linger for months, if not longer.

• “I stopped writing about banks a decade ago because banks had become boring,” Whitney said. “Now I have more than enough to write about. The banks are interesting again.”

Why it matters:

In 2007, Whitney called the housing bubble. Then she called that it would cause sizable problems for the broader economy, and the country's big banks, including Citigroup, were headed for bankruptcy.

• Months after her call, Citi's CEO Chuck Prince was out. The company was bailed out in 2008 before its shares fell more than 95% over the next two years. A decade and a half later, Citi's shares still haven't fully recovered.

In 2011, though, Whitney predicted that highly indebted local governments and rising pension obligations would crash the municipal bond market, which didn’t materialize. She also ran a hedge fund in 2013 that closed about two years later after poor performance. As with any prediction, it’s best to be taken with a grain of salt. What’s more interesting is the reasoning.

On banking: Whitney believes large banks are in good financial shape and can absorb the cost of new regulations, which Warren Buffett also noted recently.

• “Large banks are sitting in a very good position,” Whitney said. “They have more than enough deposits, so they don’t face the same pressure as regional banks.”

On the housing market: Whitney sees a prolonged slump, not a crash.

• “The foundation for consumer banking is housing, and so I am not worried about the economy because homeowners have a lot of wealth in their houses right now. Over the near and medium term, things are great.”

 

✨ The ‘Buffett Effect’ Boosts Occidental’s Stock (Bloomberg)

Perks of being known as, arguably, the greatest investor ever to live: When you endorse a stock, that alone is enough to help your pick. Warren Buffett’s blessing of Occidental Petroleum (OXY) has enabled its shares to avoid the worst of a walloping this year for energy stocks.

Buffett’s firm, Berkshire Hathaway, has consistently bought Occidental whenever its shares fall under $60, increasing its stake to nearly 25%.

• And Buffett might not be done: Regulators recently gave Berkshire a thumbs up to push its ownership levels to as high as 50%.
• One equity research analyst commented, “There’s a psychological Buffett effect.” Many investors think, “Warren Buffett likes this stock, so I should too.”

Why it matters:

See, energy has been the S&P 500’s worst-performing sector in 2023 (down 8% versus the S&P’s 12% gain), with many smaller oil & gas firms seeing double-digit losses.

• But Occidental has comparatively outperformed, and it’s done so with less volatility, too — its 90-day trading volatility is below its peers, closer to that of more stable energy giants like Exxon and Chevron, which are several times larger.

In fact, Occidental was the most-purchased stock by hedge funds in the first quarter of this year, evidence that Buffett’s approval ripples through both mom-and-pop stock pickers and professional investors.

Interstingly, some 77% of Berkshire’s nearly $350 billion stock portfolio is invested in just five stocks.

• That is, as a percentage of invested assets, Apple (47.7%), Bank of America (8.5%), American Express (7.4%), Cocla-Cola (7%), and Chevron (6%). In sixth place is Occidental (3.8%).

 

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MORE HEADLINES

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🌍 George Soros hands control of his empire to 37-year-old son

🏨 Hotels write off San Francisco as business nosedives

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