The bank's takeover of Credit Suisse is really a forced merger. Although both it and the government have done their best to shortcut future risks, it is now far more exposed to the threats of the current, volatile environment.

«We thank UBS», said Swiss finance minister Karin Keller-Suter on Sunday as the deal between the country's two largest banks was announced. After that, the chairman of the duly thanked institution, Colm Kelleher, maintained «this acquisition offers tremendous opportunities.»

At best, his comment could be seen as a much-needed salve after a very bitter turn of events, as expressed by the strained smile on still-Credit Suisse chairman Axel Lehmann's face. For his part, Kelleher's bearing was a stony one – his head pointing downwards. Was this just the poker face of a Wall Street veteran? Or was it more the expression of displeasure over a solution that is nothing but a forced merger?

Protecting Swiss Interests

The transaction has been skewed from the start. The government, the Swiss National Bank (SNB), and the Swiss Financial Market Supervisory Authority (Finma) prioritized the country's interests first. That means they needed to ensure a stable national economy and financial system above all.

Dissolving and winding up the bank, Keller-Sutter maintained, could have triggered a financial crisis. Any attempt by the government to save Credit Suisse by assuming temporary public ownership would have extended the «too big to fail» framework in place in Switzerland since 2008 into the realms of absurdity. The only option remaining was a private takeover assisted by the government and the only institution in a position to do so was UBS.

Massive Guarantees

Just how uncomfortable this merger or acquisition could turn out to be for UBS was made clear by the massive guarantees the bank received. Besides last week's announcement of the $54 billion in short-term facilities put at Credit Suisse's disposal comes a «Public Liquidity Backstop» (PLB) three times that size to allow UBS to acquire Credit Suisse.

The government will also guarantee losses of up to almost $10 billion on an unspecified derivatives portfolio. According to Kelleher, they seem to be problematic positions that UBS in any case was likely to liquidate and closer analysis and stock-taking of all risks wasn't possible given the exceedingly short time for due diligence.

Hidden Risks

UBS could experience buyer's remorse. It did not have enough time to assess the situation thoroughly and many still suspect the scandal-ridden Credit Suisse has hidden risks. That was also probably one of the reasons why the institution didn't find any buyers despite an increasingly attractive valuation, particularly after the share price started to decline steeply.

Even UBS hadn't been interested although it had gamed through a merger exercise with its still-Swiss counterpart three years ago as part of a so-called «Signal» project.

Now Switzerland's largest bank is simply trying to limit financial risks as much as possible. The initially reported bid of slightly more than $1 billion didn't come to fruition and it ended up paying over $3 billion. With that, UBS is paying 76 centimes a share.

Although that is much more than its initial bid of 25 centimes a share, it is still way below Credit Suisse's closing price on Friday of 1.86 francs. At the conference, SNB chairman Thomas Jordan said that was better than nothing for the bank's shareholders.

Time to Digest

But those holding UBS shares may now experience some blowback in the markets on Monday. Given the volatile environment for bank shares, it is hard to see where the current situation will end.

UBS also stated that it expects the takeover to be accretive to its earnings per share by 2027 at the latest. That means that the bank will be digesting its former rival for the next four years. Those are also the exact years that the bank had intended to grow its wealth management business and invest in digitalization while providing shareholders with higher dividends and plentiful buybacks. It is not yet known what will happen to those plans.

One thing did become crystal clear on Sunday. There is no back door for UBS and the bank has no choice but to keep going. As Kelleher stated, «There are no alternatives.»