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= The rescue of UBS = It is referred to UBS rescue or UBS bail out when the UBS was recapitalized by the Swiss government and the Swiss National Bank’s (SNB) in 2008 to save it from bankruptcy. On October 16, 2008 the Swiss Federal Council announced publicly that the Swiss bank was on the verge of collapse and hence is going to be rescued by the state and national bank.

The rescue plan
The rescue plan entailed $6 billion from the federal government and $54 billion from the SNB. The federal government lent UBS $6 billion with a 12.5% interest rate resulting in an eventual $1.2 billion profit for the Swiss government. As for SNB’s share, a special purpose vehicle on the Cayman Islands was established. UBS delivered $6 billion equity capital. The SNB borrowed $54 billion from the US federal reserve and bought the shares of the special purpose vehicle for a symbolic prize from UBS. It then gave the special purpose vehicle which now belonged to SNB a credit of $54 billion with an interest of LIBOR + 2.5%. UBS sold its high risk papers to the special purpose vehicle owned by SNB and received $60 billion for them. The high risk papers were toxic assets which UBS could not transform into liquid assets at the moment. The SNB was in no rush to sell the high risk papers and could therefore wait for the right timing. It gradually sold the high risk papers from the special purpose vehicle making a total profit of $5 billion. Meanwhile, UBS wrote a $20 billion deficit in 2008.

Legal foundation
The federal government was able to act so quickly because it had drawn a lesson from the Swiss Air Grounding in 2002 and had started to develop rescue plans for major Swiss banks since. On the government side, the rescue plan was implemented by Eveline Widmer Schlumpf who advocated for the minister of finance Hans-Rudolf Merz who had suffered cardiac arrest just weeks before the rescue decision. The UBS bail out was legally based on the emergency law. More specifically, the “polizeiliche Generalklausel” grants extraordinary power to the executive to overcome danger caused through internal or external disruptions. Urgency is a prerequisite to make use of the general clause and it can only be used if the problem cannot be resolved with existing laws. Based on Art. 184, section 3 and Art. 185 section 3 of the Swiss federal constitution the Federal Council signed a provision on October 15, 2008 to recapitalize the UBS AG in which Art. 1 confirmed the government’s participation with $6 billion. Urgency was assumed as UBS bankruptcy as a system relevant bank would have affected three million private clients (population of 7.6 million) as well as roughly 300’000 accounts of small to midsized Swiss enterprises. Moreover, Switzerland’s international image as financial center was to be endangered and based on Art. 184 section 3, it is the duty of the Swiss federal government to protect Switzerland’s interests abroad.

UBS illiquidity
UBS ended up in the position of having to be rescued due to its ambitious high risk growth strategy and the consequent high losses resulting from wrong speculations in the American real estate market. From being the largest wealth management firm worldwide back then, UBS strived to become the number one investment bank worldwide. The bank invested billions of dollars of its clients into high risk financial derivates and US mortgages. In 2005, UBS started to run its own hedge fund with 120 high skilled dealers under the name of Dillon Read Capital Management (DRCM). This risky expansion strategy in its investment banking was initially successful as the results in 2005 and 2006 were record high. However, the risk came at a price when everything took a turn in 2006; the mood in the US real estate market changed and UBS financial products started losing worth. DRCM had to be shut in 2007 an by the end of the year UBS registered its first one billion write-off. In December 2007 and March 2008 UBS proceeded with two increases in capital to stabilize the turbulences. On top of UBS’ struggles, Lehman Brothers bankruptcy of September 15, 2008 destroyed any remaining trust for the financial sector. It triggered panic in investors and caused a massive withdrawal of cash from UBS clients. Alone in the third quarter, UBS saw $75 billion of assets in wealth withdrawn. Yet, on the UBS general assembly of October 2, 2008, UBS president Peter Kurer assured that UBS was handling the circumstances well. Two weeks later it became known publicly that UBS sat on a pile of illiquid financial assets and faced a liquidity bottleneck that it could no longer resolve itself.

Regulations to prevent such scenario
The Swiss regulations foresee measures to prevent such a liquidity bottleneck to occur. In fact, system relevant institutions face even higher requirements of capital reserves than other institutions to remain resistant towards unexpected losses. Switzerland designated five banks as system relevant which of only UBS and Credit Suisse (CS) also operate internationally. Whether a bank is considered system relevant is evaluated by the SNB based on the criteria of size, interconnectedness in the financial sector and substitutability of its services. Apart from additional capital reserves, based on the regulations UBS (as system relevant bank) also has to annually present the Swiss Financial Market Supervisory Authority (FINMA) a recovery plan which clarifies how a potential crisis would be sustainably resolved without the help of the state. Meanwhile, the FINMA also establishes a resolution plan for system relevant banks outlining their rehabilitation or liquidation in case of emergency. These regulations did not suffice to prevent UBS to be trapped in illiquidity. Learning from the 2008 crisis, the equity capital adequacy regulations were reformed in November 2008: the Swiss Federal Banking Commission in agreement with UBS and CS substantially increased the capital provisions. In Switzerland, the requirements for equity capital adequacy combine two actual variables (attributable equity capital and risk-weighted assets) and three reference variables (required equity capital, equity cushion and leverage ratio). The reform adjusted the requirements for the equity cushion and the leverage ratio.

UBS strategy consequences
As a result of the bail out, in spring 2009, UBS replaced its whole management and considerably downsized the number of employees. Furthermore, UBS reset its focus back to wealth management. This change is apparent when looking at the number of employees and their department: In 2007 there were 22.000 employees working for the investment bank department out of overall 84.000 employees. In contrast, in 2017, they were 5.000 out of 64.000. Also, the number of employees working for the corporate center which among other things oversees the compliance to regulations, rose from 7.000 employees to 25.000.