What it takes to combine two massive Swiss banks

On paper UBS acquisition of rival Credit Suisse for a steal of CHF3 billion ($3.25 billion) was a wonderful deal. Yet the true cost will be known once the bank fusion is through which was fraught with legal regulatory and market dangers.

I can't stress enough how significant this transaction is in terms of financial engineering and financial history. That is a considerable execution risk said Colm Kelleher chair of UBS.

Getting the fusion process right could yield significant benefits. Yet the cost of failure would be devastating for Switzerland and the entire global financial industry.

The dangers

The integration of two operating systems the purging of Credit Suisse's failing investment bank and the blending of employee and corporate cultures are among the major pain areas that UBS has highlighted.

Why Switzerland is frightened by a giant UBS bank

According to Kelleher there have undoubtedly been poor cultural elements within Credit Suisse. To prevent bringing something into our ecosystem that causes problems we must put everyone through a cultural filter.

The amount UBS can learn about Credit Suisse's financial sheet before the transaction is similarly constrained.

We can only access all the information if we combine it. Ralph Hamers CEO of UBS warns us to exercise extreme caution about anti trust laws (who will be replaced by Sergio Ermotti on April 5).

Another issue in a market that is hurting from bank failures and rising interest rates is how much UBS can collect in exchange for undesirable Credit Suisse investments.

According to former UBS executive Andreas Ita currently managing partner of the Orbit36 risk consultancy there are numerous factors to consider on a fundamental operational level.

The two businesses use different IT systems. According to him the integration in this sector will probably take years rather than quarters.

He continued UBS will also take up Credit Suisse's many ongoing legal matters. This includes future legal actions brought by owners of fictitious AT1 bonds whose value was destroyed by the takeover.

The Saudi National Bank Credit Suisse's largest shareholder poured billions into the bank last year only to see most of it disappear under the conditions of the UBS takeover transaction. UBS also has the task of appeasing the Saudi National Bank.

It's political

Whether they like it or not UBS has been drawn into a political storm gathering in Switzerland.

The government invoked emergency powers to push through the takeover tossing shareholders and bondholders to the side. To compensate for potential UBS losses billions of taxpayer money have been provided.

The effects of Credit Suisse's bankruptcy on the world

The government has mandated a freeze on bonus payments to Credit Suisse. A special session of Parliament will be held to discuss the issue and many committees have committed to looking into various facets of the banking problem.

Numerous politicians are calling for the domestic retail banking division of Credit Suisse to be split off into a separate company. Because UBS claims it has no plans to split up Credit Suisse this might place politics and the bank on a collision course.

There will inevitably be layoffs among the 16,000 employees Credit Suisse has in Switzerland. UBS has yet to determine whether many of these positions will be eliminated but the bank will be pushed to keep as many as possible.

What follows is what?

After the Swiss authorities intervened major financial centers like the United States, United Kingdom and the European Union generally approved the agreement.

Attorneys are negotiating the specifics with regulators and antitrust authorities in the 58 countries where UBS conducts business.

Where did Credit Suisse make all of its mistakes?

UBS estimates it will be a few weeks before publicly unveiling its detailed takeover strategy. According to the Swiss government the deal must be completed previous to the end of the year.

According to The Financial Times UBS is already attempting to unravel the extremely complicated agreement that Credit Suisse has in place to spin off its investment banking division partially.

Is the takeover possible?

Both Swiss banks have a track record of acquiring rivals. Credit Suisse acquired the US investment bank First Boston in 1988. Ten years later the Union Bank of Switzerland and Swiss Bank Corporation merged to form UBS.

Yet this was before the phrases "Too Big to Fail" and "Global Systemically Important Bank" (GSIB) were even used during the financial crisis of 2007–2008.

According to Kelleher this is the largest financial transaction since 2008. Since it is the first time that two GSIBs have joined, I would say that it is bigger than any deal done in 2008.

According to UBS the acquisition of Credit Suisse will offer it greater clout in the US, Southeast Asia and Latin American markets. Executives are aware that there could be pitfalls though.

The megabank will still need to run profitably even if the fusion is successful.

Furthermore predicting the new entity's potential success is only possible once more information about its ultimate makeup and strategy is available.