Over the weekend UBS (SWX: USBG) (NYSE: UBS) bought Credit Suisse (SWX: CSDN) (NYSE: CS) at the bargain knockdown price of some $3.25 billion, or 3 billion CHF. This could, can, be seen as one of the bargains of the century. But as the events of this past couple of weeks have shown that's not necessarily how it works out in banking.
For other than market confidence Credit Suisse itself had no reason to be sold. It has/had entirely sufficient capital, it had the support of the Swiss National Bank to backstop liquidity, so what possible reason could there be for a forced sale? Just that markets didn't believe all of that.
Which is the important thing here. When logic, even good sense, depart from market sentiment then it's market sentiment that wins. This is inherent in the entire structure of banking. Fractional reserve banking just does mean that if everyone turns up and asks for their money back at the same time then the bank is bust.
This is what was happening to CS. They had the capital, they had - from the SNB - vast liquidity reserves. But this just wasn't enough because of that inherent risk of the background structure of banking itself.
Suisse share price NASDAQNow, UBS taking over CS might be the bazooka which restores that confidence. Bring out the Big Guns and all that. But it might not be. It's possible that this isn't enough, that the runs continue. It wasn't, particularly, that depositors were running from CS, not this past couple of days. Rather, wholesale customers were refusing to deal with Credit Suisse on the normal credit terms. Asking the investment bank for greater collateral and earlier, that sort of thing. That kills the activity of a bank as well.
So, will people being asking UBS for the same today and tomorrow? It's unlikely, to be sure, but it is conceivable.
Which is exactly why there is a rumoured clause in the agreement. If the UBS CDS (credit default swap, here best seen as a measure of how keen people will be to deal with UBS) blows out by more than 100 basis points then UBS has the opportunity to cancel the deal. We can also watch the UBS stock price for evidence as to what the equity market thinks about it. But that will almost certainly be in reaction to what the credit markets say, not a determinant of.
The standard analysis here would say that UBS got a bargain and that should be positive for the UBS equity price. But banks and confidence are funny creatures - it might not work out that way.