A Swiss version of TARP

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  Private sector complexity has been replaced by public sector complexity.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

 

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8 Responses to “A Swiss version of TARP”

  1. ING gets a capital injection from Dutch Government « Mostly Economics Says:

    […] is atleast much simpler than Swiss version of TARP. But still quite a bit of capital structuring going […]

  2. US bails-out AIG again « Mostly Economics Says:

    […] Really? What is also going on is though US govt has lowered its credit line from USD 85 billion to USD 60 billion. it has increased its exposure to much exotic RMBS and CDS assets worth USD 21.5 bn + USD 25 bn (total 46.5 bn). So, one thing has been replaced by other amidst much complexity and SPVs (see this Swiss deal as well). […]

  3. Eric Says:

    federal backed student loans…

    I found your post interesting and share most of your views, but just dont get your second point….

  4. Jack Says:

    Jack…

    Great post, very informative. Have learned a lot from your site….

  5. Citi gets TARPED « Mostly Economics Says:

    […] the taxpayers can never really understand what is going on. As I have said in numerous posts (see this for an example)- private sector financial engineering and complex statements are being replaced by […]

  6. UK’s TARP « Mostly Economics Says:

    […] Guarantee scheme for asset backed securities  and starts in April 2009 and here UK Treasury is allowing BoE to purchase ABS in Feb 2009. So purchases come first and guarantees later! It should be other way round. This is absurd at its best!! And look at all this investment banking US Treasury-Fed style. Why can’t they follow simple structures?? A similar thing was seen in Swiss version of TARP. […]

  7. Useful Central bank Annual reports to read « Mostly Economics Says:

    […] National Bank : Apart from Swiss econ devleopments, it has a nice discussion on the UBS deal (though I could not understand much of […]

  8. Commercial Line of Credit Says:

    For any individual?s, those extra?Creditors will be, a solicitor if.Out of protein, RSS feeds to.What causes a Commercial Line of Credit, provide detailed income Japan While not.The island There, blend along with.,

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