Today I Want to explain what's going to happen to Credit Suisse's short positions and their Total return swaps. Obviously, UBS has just acquired Credit Suisse but are there swaps and short positions going to transfer into UBS as well? Are they going to be closed out of before the deal is finalized? Or are they going to be sold off to another bank entirely? Or stay tuned and let's make some money and now on a dive straight in with the key information. So obviously UBS received tons of incentives from the Swiss government and a Swiss National Bank to actually complete this acquisition. First off is this giant liquidity line the Swiss National Bank has offered to UBS to get the deal done.

Now this is effectively money UBS can draw in case there's a bank run on UBS as well as go Kevin tweeted he said Switzerland's Central Bank has given UBS a liquidity line of over a hundred billion dollars to tap into as part of its deal to buy Credit Suisse And that basically means if UBS experiences a bank run as well or starts taking on heavy losses, they can effectively draw an almost unlimited amount of money from the Swiss central bank. Now on top of that, as I touched on earlier, the government have also covered the first nine billion dollars of any losses that UBS takes on, effectively paying UBS 6 billion dollars to acquire credit. Suites Obviously, UBS technically paid 3 billion, but the first nine billion of losses are covered. Therefore, UBS is effectively getting six billion dollars in cash for free to acquire Credit Suisse And on top of that, as I touched on this, 17 billion dollars worth of bonds have just been completely zeroed.

Meaning, there's almost 23 billion dollars worth of incentives given to UBS to acquire credit Suites And therefore there must be something absolutely horrific in the Credit Suites books. And on top of that, as Jim Bianco said, he also assumes the Central Bank will still honor the 54 billion Swiss Francs They promised the Credit Suisse on Thursday as well that 54 billion dollar buying out credit Suite had already received is likely to still be honored on top of that 100 billion dollar liquidity facility. Now, what's really interesting here is something that has absolutely transferred into Credit Suisse is the Arcados bullet Swaps. Now obviously, most of these bullet swaps are two-year bullet swaps.

Now you may be saying one: Tom did our chaos collapse around about two years ago? And number two, what kind of swaps did Arcados hold? Now to answer the first question, are Kagos collapsed on March 26, 2021, The two-year anniversary would be March 26 2023, only a few days from now, And therefore, Archaicos's swaps are clearly coming up for a new. and that's why UBS effectively need these additional sweeteners in the Credit Suisse deal because they know these swaps are toxic, likely to expire worthless, and with a giant liability attached that UBS couldn't cover on its own. And we also know that Arcados was shorting GameStop on AMC and was also massively over leveraged long on other positions that are likely still out there, still toxic and still about to cause a giant giant headache. And on top of that, the UBS Chairman just said after taking Credit Suisse's positions, those long data positions in derivatives AK swaps don't align with the UBS interests and therefore UBS is looking to unwind these positions, therefore meaning to close them.

Now saying unwind doesn't necessarily mean that UBS is going to close these positions. All it really means is that UBS does not want them. They are either going to close out of those positions or try and unwind and unload those positions onto another unsuspecting Bank unsuspecting hedge fund or unsuspecting Market Maker. But obviously, the main answer is is that yes, so far, these positions have indeed transferred from Credit Suisse to UBS.

but UBS absolutely does not want them because it doesn't align with their interest. Therefore, they are either looking to close those positions and cover those bullet swaps and cover those shorts or shift them onto another bank hedge fund or Market maker. As always, Sad, but truthful tweeted, he said: the UBS Chairman just admitted those swaps are level three financial instruments. Now, with financial instruments, you've got three types of evaluation measures.

You've got level one, level two, and level three. Now, this is a bit of complex accounting, but all that really means is that level one financial instruments have a quoted and traded price phrase similar, or the exact same instrument. With level Two instruments, the price can also be calculated and they are directly observable, but they're not quite the exact same as Level One quota prices. Now, with Level Three financial instruments, the value of those instruments are really difficult to calculate because they're not based on observable Market data.

Basically saying, it's really difficult to Value these swaps or to Value these short positions because they can't model anything that would really tell the true value of just how toxic these positions are because obviously the sheer amount of synthetic shares. it's really hard to model exactly what will happen during the AMC squeeze, so they can't really value just how deep in the hole they are with these toxic positions. But what we do know is that UBS are holding them because Credit Suisse while still holding them as well. but UBS absolutely wants to get rid of them.

Although it potentially won't be long until UBS realizes the nine billion dollars worth of losses the government has promised to cover may not be enough to close out of those short positions. As I said, the value of these instruments have no observable Market data. Therefore, it's really difficult for UBS to try and figure out exactly how much liabilities they're going to take on if these positions were closed and therefore May likely try and sell them off to another bank Market maker or hedge fund Either that or they may try and exercise the positions and close out of those short positions and effectively cross their fingers and hope they don't end up bankrupt. But it seems that investors are perceiving this risk is much greater than UBS is estimating.

and that's why the UBS credit default swaps have just started to go crazy. As Bloomberg tweeted, they said investors are perceiving a much higher risk when it comes to UBS the cost of ensuring debt of a UBS group AKA Those credit default swaps within the next five years has risen by 63 basis points. We can see that in November December these credit default swaps shot to around 150 basis points. They then obviously called off only to around 75 basis points, but in the last few days they've shot all the way to 230 240 basis points.

It seems the market did not like the acquisition of Credit Suisse by UBS and the market believes that Credit Suisse has not got a good enough deal. Even though they've effectively been given 23 billion dollars in incentives with a backstop facility of 150 billion dollars, the market still doesn't think it's going to be enough. Basically saying clearly, the market is expecting a massive, massive blow up of these Credit Suisse bullet swaps that may end up bankrupting UBS as well. And on top of that, it's not just a UBS that's struggling because Executives of First Republic Bank are scrambling to find a buyer and announce a deal sometime today or sometime over Sunday Monday or Tuesday And given the market sentiment, First Republic may not survive the coming days and so far a buyer is unclear.

it's the bestie letter tweeted. It seems the U.S government and the FDIC and the FED are completely unorganized and do not have a handle of what's currently going on with a banking crisis. They said first, they tried to get large Banks to save the day, then they tried to find a buyer for Silicon Valley Bank but couldn't Now they're meeting with Warren Buffett for help to bail out the financial system and he said this is the last thing we need to restore confidence in the system and he said it's becoming even more evident that large Banks and funds will win from this. He said governments are desperate to contain the crisis and don't want to take on the burden, but investors are already looking for a bargain it seems to defend.

The government are absolutely clueless as to what to do, and they're trying to get any bank to rescue any other bank we without stepping in too much. So far, it seems like a complete repeat of 2008 when the FED in the government were days if not weeks behind what was actually happening. and as I said, this may also be the case for UBS that could be completely underestimating just how much toxic liabilities Credit Suisse actually have or just how much damage those toxic liabilities can actually do. But guys, be sure to let me know what you think down in the comments below.

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