Swiss back UBS with $54 billion

Swiss back UBS with $54 billion

Government, joining global capitalization move, also raise depositor protection in bid to deal with crisis.

BERN, Switzerland (AP) -- Switzerland followed the lead of other European countries and the United States on Thursday by announcing it would inject billions of dollars into its banking system.

The main recipient will be UBS AG, which is being offered up to $54 billion so that it can part with securities that have gone bad since the start of the worldwide financial crisis.

Switzerland's largest bank, which racked up losses and writedowns totaling about 45 billion francs ($40 billion) over the past year, will also receive $6 billion from the government in return for mandatory convertible bonds.

The measures will allow UBS to dispose of about $31 billion in high-risk papers linked to the U.S. subprime market and $18 billion in non-U.S. securities, by handing them over to a specially-created vehicle whose sole purpose is to sell off the stock.

The vehicle will be controlled by the Swiss National Bank but managed by UBS, and any profit will be shared equally between the two after a one-off payment of $1 billion to the SNB.

UBS will also have the opportunity to pass a further $9 billion in other securities to this vehicle, including the $5 billion worth of auction rate securities the bank was recently forced to buy back from U.S. investors.

The government said the support package for its banks will also see the account holder protection for ordinary customers raised above the current threshold of 30,000 Swiss francs ($26,250).

The exact level has yet to be determined, though Switzerland's acting finance minister, Eveline Widmer-Schlumpf, said the threshold of 50,000 euros ($67,400) recently agreed by the European Union was a guide.

UBS rival Credit Suisse said it had also been offered government assistance but would not make use of it at this time, choosing instead to raise about 10 billion francs ($8.75 billion) on the open market.

The largest amount would come from the Qatar Investment Authority, a government-controlled fund, it said. While Switzerland's No. 2 bank has been less affected by the global financial turmoil, it said it expected to report losses of 1.3 billion francs ($1.12 billion) for the third quarter of the year.

Meanwhile, UBS said it expected to report a profit of almost 300 million francs for the period -- its first since the second quarter of 2007. Thursday's announcement caused turmoil on the Swiss stock exchange, initially sending UBS shares 7.8% lower before investors took heart from the measures. By late morning the bank's shares were trading 4% higher at 20.88 francs ($18.38). Credit Suisse shares were up almost 8% at 49.50 francs ($43.57) in Zurich.

Analysts at Zuercher Kantonalbank welcome the fact that the government measures will allow UBS to dispose of a large part of its bad assets in one fell swoop, but warned that they come at a considerable cost to the bank in terms of loan repayments to the SNB.

They also noted that UBS has continued to suffer massive capital outflows as clients withdrew 84 billion francs ($74.1 billion) during the past quarter, indicating a further loss of confidence in the Swiss bank.

UBS will have to call an extraordinary shareholders meeting in November -- its third this year -- to get approval for the refinancing measures.

The bank has struggled to regain investor confidence in recent months after admitting that its so-called "integrated business model" and lack of management oversight were partly to blame for the risky investment strategies that caused the billion-dollar losses.

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