UBS moved its toxic assets into a central-bank bad bank — and bought them back in 2013

On 16 October 2008, a month after Lehman Brothers failed, the Swiss National Bank announced that it would finance the transfer of illiquid assets from UBS to a special purpose vehicle in a maximum amount of USD 60 billion — part of a package of measures taken by the Swiss Confederation to strengthen the country's financial system. On 26 November the SNB established the vehicle, the SNB StabFund limited partnership for collective investments, incorporated in Berne, and on 16 December the first tranche, USD 16.4 billion of assets, crossed over.

The structure was the point. Per the SNB's announcement, the vehicle would acquire UBS assets up to a maximum of USD 60 billion, funded by UBS with equity equal to 10% of the purchase price — a maximum of USD 6 billion — and by an SNB loan for the rest. UBS injected that equity "by acquiring an option to purchase the special purpose vehicle after the SNB loan has been repaid in full". The bank had not sold its toxic assets outright; it had bought a call on their recovery. The Confederation took a stake in UBS as part of the same package.

In the event USD 38.7 billion of assets moved across, underpinned by a USD 25.8 billion loan from the central bank. After initial losses the fund climbed into the black; UBS repaid the loan in August 2013, three years earlier than planned, and on 7 November bought back the USD 6.5 billion of assets that remained unsold, paying USD 3.762 billion (CHF 3.44 billion) — a USD 1 billion upfront payment plus half the value of what was left. The SNB was left with a USD 5.4 billion windfall including USD 1.6 billion of interest, and the Swiss government made more than CHF 1 billion on its stake.

UBS shed $38.7bn of illiquid assets against a $25.8bn central-bank loan, repaid it in August 2013 three years early, and bought back $6.5bn of residual assets.

The 10%/90% split let UBS commit up to USD 6bn of its own equity against a USD 60bn problem, so the central bank funded the portfolio while the bank kept skin in the game.

That equity took the form of an option to buy the vehicle back once the loan was repaid — UBS kept the upside if asset prices recovered, which they did.

Orderly liquidation in a dedicated vehicle beat a fire sale: it removed the assets from a balance sheet without forcing UBS to price them into a market with no buyers.

Recovery rather than relief paid for the exit: repaying the USD 25.8bn loan three years early is what unlocked the buyback of the residual USD 6.5bn of assets.

The state acted as lender and shareholder of first resort and left with a profit — USD 5.4bn for the SNB and more than CHF 1bn for the Confederation.

A bad bank that hands the seller a call option on its own assets turns a rescue into a recovery trade: the state funds the portfolio, the firm keeps the upside if prices return.

Thomas Jordan, SNB chairman and StabFund board president, called the transfer a successful conclusion but warned that "the financial success of the StabFund is not reason enough to endorse government bailout of banks", adding that the state should never again have to rescue a failing bank and that "too big to fail" legislation should be rigorously implemented. For UBS the buyback was a capital decision as much as an exit: the bank had said taking the remaining assets back would boost its capital and strengthen its resistance to future shocks — a recovered portfolio, not a discarded one.