Archive for October 16th, 2008

A Swiss version of TARP

October 16, 2008

Swiss have introduced their own version of TARP. This goes one step further. In TARP and other supports, Treasury has taken asset-buys or capital infusions and Fed has provided liquidity.   

In the Swiss TARP, Swiss Central Bank takes charge and sets up a SPV to transfer distressed assets from UBS.

According to the agreement with the SNB, UBS sells the securities to a special purpose vehicle and provides capital in the maximum amount of USD 6 billion, which will serve as a first protection against losses. The SNB finances the purchase of these assets by granting the SPV a secured long-term loan in an amount not exceeding USD 54 billion and obtains control over the SPV. After full repayment of the loan, the SNB participates in profits generated by the SPV with USD 1 billion up-front and with 50% of eventually remaining equity value.

Distressed assets worth USD 60 billion will be transferred to the SPV. The SPV willl be funded by USD 54 billion from SNB and 6 billion from UBS. Further try and understand this:

The loan granted by the SNB in an amount not exceeding USD 54 billion will be secured by a security interest perfected in all of the SPV’s assets. The SPV pays interests at the one month USD-Libor-Rate plus 250 basis points. Payments streams from interest payments, repayment of principal, and the sale of assets will be used primarily to repay the SNB loan after coverage of operating expenses. The term of the credit will be 8 years but can be  extended to a maximum of 12 years in order to permit an orderly liquidation of the assets.

The SNB will have no recourse against UBS for this credit. The SNB’s credit is in USD since the assets are primarily denominated in this currency. Initially, the SNB will provide for the necessary currency from the US Federal Reserve through a Dollar-Swiss-Franc swap. Thereafter, the SNB will turn to the market for refinancing. It does not intend to use its currency reserves.

Pheww! There is just too much i-banking and capital structuring is going on.  Private sector complexity has been replaced by public sector complexity. Are there any changes? Any lessons? Does the public in Switzerland (apart from fin people) understand the deal?

If this was not enough, just see UBS website for asset types included in the deal:

  • US sub-prime
  • US Alt-A
  • US prime
  • US commercial real estate and mortgage-backed securities
  • US student loan auction rate certificates and other securities backed by student loans
  • US reference-linked note program (RLN)

So, almost everything illiquid and highly risky. Reading the UBS statement further will give even the best fin guys a headache. And we thought we will have some simplicity after UBS appointed a communication officer.

 

The statement from Chairman, Jean Pierre Roth says the action despite its need is “unprecendented”. What is going on?

Addendum:

Read FT Alphaville comments

 

Advertisements

Interview with Christina and David Romer

October 16, 2008

Minneapolis Fed has an excellent interview/profile of the Romer couple – Christina and David. They both have done some excellent research and the profile explains the research and its implications.

Q&A with Bernanke on financial crisis

October 16, 2008

WSJ compiles a nice Q&A  session with Bernanke. I didn’t like this statement:

Now, as I’ve described, we are involved now in the capital-injection program. One of the great virtues of the TARP is that it is flexible and it can be used in different ways, as required.

What next?

Assorted Links

October 16, 2008

1. WSJ Blog points to a letter from Iceland. Fed speak- Bernanke, Kohn

2. Krugman explains his work. Blattman points to Krugman’s views on dev eco

3. JRV raises concerns in housing market in India

4. IDB points to food and malnutrition in India

5. MR on usefulness of blogs

6. CMB says where is the credit crunch; see this as well

7. DB says landlocked economies do worse than coastal economies

8. Econbrowser points time to buy stocks


%d bloggers like this: