Macro Digest: Implications of the UBS takeover of Credit Suisse.

The accelerating concern in the market was crystallized at the weekend with the Credit Suisse takeover deal: the Swiss National Bank, single handed, has put every investor in AT1 on notice. In a bail-out, AT1 bonds will be written down to zero. This forces rerating and probably massive repricing of CoCo bonds on the market open in Europe tomorrow.

This to me is once again short-term and short-sighted policy response to an essential problem. The banking  system has been diluted from accountability as crisis by crisis has left regulators and central banks accepting more accrued losses and left capital requirements weak, insufficient and worst of all based on internal models designed by the banks themselves.

The 3-6-3 banking model (borrow at 3%, lend at 6% and hit the golf course at 3 p.m.) died in 2008 and was replaced by ‘Financial Engineering’ as both the main earner with clients but also the sharpest tool in risk management of the banks.  Financial engineering squared was never a good idea and it really risking a failure of the whole banking model itself.

Update on market 00:20 CET:

The market opened up in early trading, driven by liquidity swaps from central banks and the non-solution on CS-UBS. This mini-rally may last an hour, a day or a week, but ultimately we will need to revisit the fact that policy makers have lost credibility and when investors are losing faith in the system, money will flow to assets which are tangible and guaranteed, for example:

• Gold
• Short-term government bonds
• Japanese Yen (JPY)

These are the high probability winners…… tomorrow if I am right about the “new stress” in AT1, then the EUR could start to sell off. The large European (and UK) banks have large outstanding Tier1-linked corporate bonds.

THE data point to monitor tomorrow is this underlying index for the Wisdomtree CoCo ETF noted above:  The Ibox Contingent Convertible Liquid Index.