UBS Agrees to Buy Back Rescue Fund for $3.8 Billion

UBS AG (UBSN), Switzerland’s largest bank, agreed to pay $3.8 billion to buy back the fund for toxic assets set up by the central bank in 2008 as part of a bailout.

The Swiss National Bank (SNBN) said the price corresponds to its contractual share in the fund’s equity at the end of September, according to an e-mailed statement today. Under the agreement, UBS paid the central bank $1 billion plus 50 percent of the value of the fund’s remaining assets. At the end of 2012, the SNB would have received $3.27 billion under the same formula.

The Stability Fund was established in October 2008 as part of measures to bolster UBS and the Swiss financial system. UBS spun off $38.7 billion of risky assets into the fund, while the government provided 6 billion francs ($6.5 billion) of equity and the Zurich-based SNB made a loan to support the assets as they were being run down. The government sold its investment in UBS for a profit of 1.2 billion francs.

“At the beginning, risks were very high and we didn’t do it in order to achieve a profit out of it,” SNB President Thomas Jordan said at a briefing in Zurich today. “We conducted the Stability Fund exercise in order to guarantee the stability of the Swiss financial system.”

Photographer: Gianluca Colla/Bloomberg

A pedestrian carries a yellow parcel as he walks past a the illuminated entrance of a UBS AG bank branch in Lausanne, Switzerland. Close

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Photographer: Gianluca Colla/Bloomberg

A pedestrian carries a yellow parcel as he walks past a the illuminated entrance of a UBS AG bank branch in Lausanne, Switzerland.

UBS needed state aid after the bankruptcy of Lehman Brothers Holdings Inc. froze financial markets and the lender’s mistimed bet on the U.S. housing market resulted in more than $57 billion in writedowns and losses during the subprime crisis.

Capital Buffers

“The financial success we’ve achieved shouldn’t be reason to believe that we’ll have a favorable view toward bank bailouts in future,” Jordan said. While the industry has made “big progress” on bolstering capital buffers, “we’ve emphasized that banks need to improve their leverage ratios further.”

Switzerland introduced some of the strictest capital and liquidity rules in the world, forcing its two biggest banks, UBS and Credit Suisse Group AG (CSGN), to hold capital equal to as much as 19 percent of risk-weighted assets by 2019. In June, the SNB told the two banks to boost their leverage ratios, which measure their capital against total assets, before 2019, when the largest Swiss banks will be required to have a ratio of at least 3.1 percent.

Finma ‘Add-On’

UBS said last month that exercising the option to repurchase the fund won’t have a “material” impact on its profit. The repurchase adds 2.5 billion francs to its common equity Tier 1 capital needed to meet Basel III rules, the bank said today in an internal memo to employees obtained by Bloomberg News. That will partially offset a new capital requirement imposed by Finma, Switzerland’s market supervisor.

The Finma “add-on” order issued at the end of the third quarter requires UBS to hold more capital to help absorb potential charges related to litigation and compliance matters.

The fund consisting of securities, loans and derivatives was jointly run by three members of the SNB and two from UBS, with the a central bank representative acting as chairman. A group of about 70 UBS employees managed the sale of the assets, which was originally planned over eight years.

At the end of September, a month after the final repayment paved the way for UBS to buy back the remaining assets, the fund “was left mostly with cash equivalents,” giving it a value of $6.5 billion in equity, the SNB said.

“When the market situation was good, assets were sold rapidly, while restraint was exercised when market setbacks were experienced,” the SNB said. “U.S. securities in particular recorded cash flows over the entire life of the portfolio in excess of the purchase price paid to UBS at the outset. By contrast, the situation for European assets was less favorable, since the euro debt crisis from 2010 had a negative impact on the value of these positions.”

The SNB said it has earned interest income of $1.6 billion over the term of the loan in addition to the $3.8 billion share in the equity. The purchase price will have a “favorable impact” on 2013 results, it said without providing details.

To contact the reporters on this story: Simone Meier in London at smeier@bloomberg.net; Zoe Schneeweiss in Zurich at zschneeweiss@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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