Credit Suisse, the troubled Swiss-based investment bank, received an offer from their intra-country rival Union Bank of Switzerland (UBS) to purchase it for around $1 billion, according to The Financial Times. Swiss regulators spearheaded the deal to help restore trust and calm in a highly volatile global banking environment over the last few weeks.
The Wall Street Journal reported talks are still ongoing, and the deal may be subject to change. In the wake of the sudden closures of U.S.-based Silicon Valley Bank, Signature Bank, and Silvergate Bank, along with concerns over the financial strength of the balance sheets of hundreds of small and regional banks, UBS and Swiss regulators need to plan for several exogenous factors that could impact the acquisition. One concern is how much money the Swiss authorities will allocate for guarantees or backstops if the worldwide banking situation worsens.
Both banks offer similar services. UBS and Credit Suisse provided investment banking, high-net-worth wealth management, asset management, stock and bond sales and trading. UBS has more than 74,000 employees working from nearly 50 countries. Credit Suisse is also international and the second largest Swiss bank with around 50,480 employees.
Prepare For Large Layoffs
It is likely that once the two similar institutions combine, significant layoffs will be announced. Since the two financial institutions offer similar products and services, considerable redundancies will exist.
Recruiting on Wall Street for more than twenty-five years, I’ve seen this trend play out on many occasions. The firm initiating the takeover will drive the process and lean towards saving their employees, to the detriment of those who work for the acquired company.
Since there’s overlap in nearly all the divisions, intense competition between talented people at each organization will occur to keep their jobs. Leadership will likely let go of thousands of workers to save money, cut costs, and streamline the new entity during a challenging economy.
Wall Street has already caught the layoff contagion. Top-tier New York City-based investment bank Goldman Sachs let go of around 4,000 white-collar professionals impacting around 8% of the bank’s worldwide workforce. Goldman laid off 500 employees in September as the economy faltered.
Morgan Stanley, a top competitor of Goldman, let go of around 1,600 people. Credit Suisse, previously announced before the SVB implosion that it would would ax around 5,000 jobs anticipating a reduction in the number of white-collar professionals from 52,000 global employees to about 43,000, including allowing for attrition without refilling open roles.
Wells Fargo laid off hundreds of people in its mortgage division because of high interest rates hurting the real estate market. UK-based Investment bank Barclays, with a strong presence in the U.S., is exiting about 200 employees in its banking and trading units, and Citigroup laid off about 50 traders.
Tens of thousands of people may be out of work due to the closures of SVB, Signature Bank, Silvergate Bank, and other banking and financial companies with problematic balance sheets, forcing them to slash costs, including downsizing bankers and other personnel.
Why This Is Happening
Credit Suisse, a 167-year-old bank, is one of the world’s largest money management firms, ranked among the top 30 global systemically important banks. If the bank fails, it could cause a significant contagion, similar to how the US was concerned about the fall of SVB, which is much smaller than Credit Suisse.
The drama is playing out somewhat like during the great financial crisis. The federal government pushed JP Morgan to absorb the collapsing Bear Stearns investment bank, and Bank of America took on the once venerable Merrill Lynch. Similarly, UBS was reportedly under the gun of Swiss authorities to acquire its competitor to avoid fueling the fire on an unstable global financial market.
History Repeats Itself
JP Morgan CEO Jamie Dimon bailed out Bear Stearns at the behest of the U.S. government. Ten-plus years after the financial crisis, Dimon said in a letter to shareholders a few years ago about whether or not he’d do this again, “No, we would not do something like Bear Stearns again — in fact I don’t think our Board would let me take the call.”
At that time, CNBC reported that JP Morgan needed to fund $6 billion for severance packages, ongoing litigation, asset write-downs and an array of expenses. Dimon was cajoled to also picking up Washington Mutual, which saddled JP Morgan with toxic mortgages, and held legally accountable for at least $19 billion in fines and settlements with multiple regulators in 2013.
UBS Is Concerned Over Regulatory Baggage And Backstoping Losses
Credit Suisse brings regulatory baggage. The bank was recently embarrassed by its unfortunate dealings with the now-bankrupt Greensill Capital and their connection with the alleged scandal involving Bill Hwang’s Archegos Capital Management hedge fund creating a loss of $5 billion—representing about a year’s worth of profit.
Credit Suisse, started in 1856, now confronts the unpleasant matter of its shareholders being wiped out. Like other banks, the financial institution faced sudden withdrawals of their funds. Venture Capitalists called for the U.S. government to backstop any losses emanating from SVB’s shutdown, feverishly trying to get their money out of the bank causing concern and some panic. Similarly, social-media-induced comments spooked Credit Suisse’s wealthy clients to take their funds elsewhere.
Given all the uncertainty, UBS seeks concessions and protections from the government. In addition to bank safety matters, UBS wants to be protected from pending regulatory investigations and legal issues, which could result in hefty fines.