The rescue of 16 October 2008

From Lehman Brothers to the weekend decisions

The authorities had begun to prepare long before the crisis reached its climax. When the interbank market dried up on 9 August 2007, the National Bank and the Banking Commission activated the crisis structures they had maintained since the 1990s. In January 2008, according to the Parliamentary Control Committees, the heads of both institutions informed the head of the Federal Department of Finance that UBS faced serious difficulties. From then on, the trilateral crisis organisation of the department, the National Bank and the Banking Commission prepared a serious crisis scenario. Since none of the scenarios prepared in earlier years had envisaged a crisis of the entire financial system, the committees found, no operational plans were ready for such a case.¹

The collapse of Lehman Brothers on 15 September 2008 transformed the situation. Money markets froze and counterparties withdrew funding from banks regarded as weak. For UBS, which needed further capital in any case, the pressing question became whether it could survive a run by wholesale creditors and wealth management clients. On the evening of Saturday, 20 September 2008, the head of the Federal Department of Finance, Federal Councillor Hans-Rudolf Merz, suffered a cardiovascular collapse. The members of the crisis organisation learned of it the following day, and Federal Councillor Eveline Widmer-Schlumpf, head of the Federal Department of Justice and Police, took over his responsibilities during the decisive weeks.² According to a later reconstruction in the Swiss press, Philipp Hildebrand, vice-chairman of the National Bank’s Governing Board, had summoned the chairman and the chief executive of UBS on the same weekend and told them to prepare for a rescue. Representatives of the National Bank, the Banking Commission and the bank then met in the following weeks at places chosen to avoid attention. The director of the Banking Commission, Daniel Zuberbühler, later recalled that they had met “at times and places where nobody expected us”.³

The Federal Council as a body was involved late. The Parliamentary Control Committees found that it had received no briefing on the crisis preparations between December 2007 and April 2008, although these preparations were intensive, and that the head of the finance department had justified this by his fear of indiscretions. The Federal Council became active in the matter only in the first half of October 2008 and then took its decisions under great time pressure. The committees described the fact that the government did not trust itself to keep a secret as shocking. On 15 October 2008 the Federal Council approved the package, which was announced the next morning.⁴

The stakes justified the secrecy. UBS served about one million private clients and some 300,000 companies in Switzerland, and together with Credit Suisse it provided a large share of the credit to small and medium-sized enterprises.⁵ The Federal Council later estimated the potential cost of a collapse of the system at between CHF 75 billion and CHF 150 billion, equivalent to 15 to 30 per cent of annual gross domestic product. The deposit protection scheme of the time, by contrast, covered only CHF 30,000 per depositor and was limited to a system-wide total of CHF 4 billion, a sum that would not have gone far if a bank of the size of UBS had failed.⁶

The mandatory convertible notes of the Confederation

The first element of the package strengthened the capital of UBS directly. The Confederation undertook to subscribe mandatory convertible notes of CHF 6 billion. The notes had a term of 30 months and carried a coupon of 12.5 per cent a year, which amounted to CHF 750 million annually. They could not be repaid in cash and were to be converted into UBS shares at maturity at the latest, at a conversion price that lay between a floor of CHF 18.21 and a cap of around CHF 20.24 per share.⁷ At the floor price, conversion would have given the Confederation a stake of about 9.3 per cent of the bank.⁸ After the extraordinary general meeting of 27 November 2008 had created the conditional capital required, the notes were issued in early December 2008.⁹

The coupon was deliberately high. Two economists writing in Die Volkswirtschaft shortly after the announcement explained that the rate of 12.5 per cent protected the interests of the taxpayer and avoided an immediate dilution of the existing shareholders. They placed the Swiss solution between the American plan, which initially concentrated on purchases of toxic assets, and the British model of direct recapitalisation.¹⁰ The notes also allowed the Confederation to avoid voting rights and board seats for as long as the instrument remained unconverted. That feature matched the political preference of the governing parties, which wished to save the bank without nationalising it.

The recapitalisation came with conditions. UBS undertook to follow best practice in remuneration, to be defined in consultation with the Banking Commission, and to disclose all relevant information to the authorities. The Banking Commission accompanied the package with measures that went beyond UBS. In November 2008 it issued orders to both big banks raising their capital targets well above the Basel II minimum and introducing a leverage ratio, which required core capital of at least 3 per cent of total assets at group level and 4 per cent at the level of the individual institution, with domestic lending excluded from the calculation and a transition period until 2013.¹¹

The SNB StabFund

The second element was larger and more unusual. The National Bank agreed to create a special purpose vehicle that would buy illiquid securities and other assets from UBS up to a value of USD 60 billion. The vehicle was to be financed with an equity contribution by UBS of up to USD 6 billion, equal to ten per cent of the purchase price, and a loan from the National Bank of up to USD 54 billion.¹² The loan carried interest at one-month Libor plus 250 basis points. As further compensation, the National Bank received warrants on 100 million UBS shares, which could be exercised if the fund incurred a loss.¹³

The design allocated the first losses to UBS through its equity contribution and the remaining risk to the National Bank, which held the loan. The prices at which the assets were transferred were decisive. The National Bank laid down that the lower of two values would apply: the book value in the accounts of UBS as at 30 September 2008, or a value determined by the National Bank on the basis of independent opinions. UBS received an option to buy back the vehicle once the loan had been repaid. The National Bank was entitled to the first USD 1 billion of any remaining equity and to half of the rest.¹⁴

The question of domicile caused political controversy. The first plans provided for a vehicle in the Cayman Islands, a location that attracted criticism in Switzerland because it seemed to associate the central bank with an offshore jurisdiction at the moment of a rescue paid for by the Swiss public.¹⁵ On 26 November 2008 the National Bank announced that the vehicle would be set up as a limited partnership for collective investment domiciled in Berne. Its general partner, an entity owned by the National Bank and bearing unlimited liability, was to be managed by Thomas Jordan, then a member of the Governing Board. UBS would continue to manage the assets for the time being, and PricewaterhouseCoopers was appointed auditor.¹⁶ The vehicle took the name SNB StabFund.

The transfers took place in three tranches between December 2008 and April 2009. On 3 April 2009 the National Bank reported that the transfer had been concluded and that the fund had acquired assets totalling USD 38.7 billion, far below the ceiling of USD 60 billion. The purchase price was USD 0.7 billion lower than the book value of the assets in the accounts of UBS at the end of September 2008. The fund held securities backed by American and European residential and commercial mortgages, loans for real estate financing in the United States, Europe and Japan, and derivative positions linked to real estate prices, with 55 per cent of the assets denominated in US dollars and the remainder in euros, pounds sterling, Swedish kronor and yen.¹⁷ The financing consisted in the end of a loan by the National Bank of USD 25.8 billion and an equity contribution of USD 3.9 billion, while UBS paid USD 3.9 billion for its repurchase option.¹⁸

The combination of the two instruments distinguished the Swiss rescue from most of those undertaken elsewhere in October 2008. While the United Kingdom recapitalised its banks directly, the United States initially proposed to buy troubled assets on a large scale. Switzerland did both for a single institution, using the central bank’s balance sheet for the asset side and the federal budget for the capital side.¹⁹ The operation was large even by international standards. Converted into francs, the maximum commitment of the National Bank and the Confederation was put at about CHF 68 billion when the package was announced.²⁰

Emergency law and parliamentary approval

The legal basis of the rescue remains one of its most discussed aspects. The Banking Act of the time contained no provisions for the recapitalisation of a bank by the Confederation, and the budget held no credit for such a purpose. The Federal Council therefore adopted, on 15 October 2008, an ordinance on the recapitalisation of UBS AG, which it based directly on the Federal Constitution. In its later report on the use of emergency law, the Federal Council stated that its measures for the recapitalisation of UBS rested directly on Article 184 paragraph 3 of the Constitution, which allows it to issue ordinances and rulings where the safeguarding of the interests of the country in its external relations so requires, and on Article 185 paragraph 3, which empowers it to issue ordinances to counter existing or imminent serious disturbances of public order or internal or external security. The ordinance authorised the government to obtain the necessary credits through the urgent procedure of the Financial Budget Act, under which the Finance Delegation of the two chambers approves an expenditure in advance and Parliament gives its approval afterwards.²¹

The Federal Council considered and rejected the alternative of urgent federal legislation under Article 165 of the Constitution. Because even urgent legislation requires debates in both chambers, the government judged that route too slow in view of the rapid deterioration of the situation of UBS. The measures of the National Bank required no special legal basis. The central bank relied on its general mandate to contribute to the stability of the financial system and on its power to conduct transactions with banks, as laid down in the National Bank Act of 2003.²² The recapitalisation ordinance lapsed once the Confederation had sold its stake. It was repealed with retroactive effect to 25 August 2009 by an ordinance of 20 January 2010. At the time no rule limited the validity of such ordinances. The six-month limit that now applies to emergency ordinances of the Federal Council was introduced only later.²³

The use of constitutional emergency powers for the benefit of a private bank provoked strong criticism. Constitutional lawyers asked whether the protection of a single company could be described as the safeguarding of the external interests of the country, and whether the circumvention of Parliament was compatible with the principle of legality. Others argued that the collapse of UBS would have threatened public order in a sense that justified the use of Article 185.²⁴ The Federal Council defended its approach in 2024, when it reviewed the use of emergency law in the rescue of UBS, in the COVID-19 pandemic and in the takeover of Credit Suisse. It concluded that it may use its constitutional emergency powers whenever fundamental legal interests that the state has a duty to protect are acutely endangered, a formula that extends beyond traditional police functions to the stability of the economic system.²⁵

Parliament debated the package in the winter session of 2008 under the business number 08.077. The Federal Council submitted its dispatch on 5 November 2008.²⁶ On 8 December 2008 the National Council approved the package by 116 votes to 55. The Social Democrats and the Greens voted against it, because the majority had rejected all their proposals. These proposals included a limit of CHF 800,000 on the annual pay of managers, a prohibition on dividends and a direct participation of the Confederation in the capital of UBS. A motion to nationalise the bank failed by 157 votes to 10.²⁷ The Council of States debated the package on 15 December 2008. It first adopted, by the casting vote of its president, a demand that UBS recover unjustified bonuses. This provision was dropped in the reconciliation between the chambers, so that the package was approved in the form proposed by the Federal Council.²⁸

The political alignment was characteristic of Swiss politics. The centre-right parties supported the rescue while criticising the former management of UBS. The Social Democrats, whose electorate felt most strongly that public money was being used to save bankers, demanded much tighter conditions, including a direct equity stake that in their view should have amounted to a third of the bank.²⁹ The debate prefigured the lines along which the remuneration question and the too-big-to-fail legislation would be fought over the following years.

At the same session Parliament strengthened the protection of depositors. Urgent amendments to the Banking Act raised the protected amount from CHF 30,000 to CHF 100,000 per depositor and bank, extended the protection to all types of account, raised the system-wide ceiling of the banks’ contribution obligation from CHF 4 billion to CHF 6 billion, required banks to hold domestic assets covering 125 per cent of their privileged deposits, and allowed payments to depositors outside the ordinary collocation procedure.³⁰ These rules were initially temporary. They were later made permanent and formed the basis of the deposit protection system that was revised again after the collapse of Credit Suisse.

Credit Suisse and the private route

Credit Suisse was informed of the planned rescue of UBS and was offered similar support. According to later reconstructions, the authorities notified the bank on 9 October 2008.³¹ Credit Suisse declined and announced on 16 October that it had raised CHF 10 billion from investors, among them Qatar Holding, the Saudi-based Olayan group and the Israeli company Koor Industries. The capital consisted of treasury shares worth CHF 3.2 billion, convertible bonds of CHF 1.7 billion and hybrid tier 1 bonds of CHF 5.5 billion, and raised the bank’s pro forma tier 1 ratio to 13.7 per cent. Its chief executive Brady Dougan explained that being in a position of unquestioned capital strength would be paramount in turbulent markets.³²

The decision was celebrated at the time as proof that the second big bank on the Paradeplatz had managed its risks better than its rival across the square. In part the celebration was justified. As FINMA later recorded, Credit Suisse had begun to reduce its subprime exposure in the fourth quarter of 2006, earlier than UBS.³³ Yet the private route also created dependencies that shaped the later history of the bank. Investors from Qatar and Saudi Arabia became long-standing major shareholders of Credit Suisse, whose presence played a part in the events of 2022 and 2023 that chapter G.V describes. The decision to avoid state aid in 2008 therefore belongs to the prehistory of the collapse fifteen years later, as much as to the history of the crisis.

Notes

1. GPK report of 30 May 2010 (as above), findings on crisis preparation. ↩
2. GPK report of 30 May 2010 (as above), account of the events of 20 and 21 September 2008. ↩
3. Daniel Hügli, “So liefen die dramatischen Tage bei der UBS-Rettung ab”, cash.ch, 3 October 2018, https://cash.ch/news/politik/grossbanken-so-liefen-die-dramatischen-tage-bei-der-ubs-rettung-ab-1213561. The article describes Hildebrand as president of the National Bank; in September 2008 the Governing Board was chaired by Jean-Pierre Roth, with Hildebrand as vice-chairman. ↩
4. GPK report of 30 May 2010 (as above), chronology for 15 and 16 October 2008. ↩
5. Armando Mombelli, “The day UBS, the biggest Swiss bank, was saved”, swissinfo.ch, 16 October 2018, https://www.swissinfo.ch/eng/business/2008-crisis_the-day-ubs-the-biggest-swiss-bank-was-saved/44474630. ↩
6. politchronik.swiss (Année politique Suisse), “Massnahmenpaket zur Stärkung des schweizerischen Finanzsystems (BRG 08.077)”, https://politchronik.swiss/de/prozesse/15091-massnahmenpaket-zur-starkung-des-schweizerischen-finanzsystems-brg-08-077. ↩
7. UBS AG, Extraordinary General Meeting of 27 November 2008, invitation, agenda item 1 (creation of conditional capital for the mandatory convertible notes), https://www.ubs.com/global/en/about_ubs/investor_relations/agm/previous-agms/2008/egm27nov2008/invagenda/item1.html. The invitation also gives a pro forma tier 1 ratio of 11.9 per cent after the transaction. ↩
8. Business Standard (Bloomberg), 17 October 2008 (as above). ↩
9. Yale Program on Financial Stability, “Switzerland: UBS Capital Injection, 2008” (as above). ↩
10. Martin Hess and David Gerber, “Finanzkrise: Die Schweizer Lösung im internationalen Vergleich”, Die Volkswirtschaft, 1 December 2008, https://dievolkswirtschaft.ch/de/2008/12/gerber-11/. ↩
11. Swiss Federal Banking Commission, Jahresbericht 2008 (as above), section on capital requirements for the big banks. ↩
12. UBS AG, EGM invitation of 27 November 2008, agenda item 1 (as above). ↩
13. Yale Program on Financial Stability, The New Bagehot Project, “Switzerland: UBS Restructuring, 2008”, https://newbagehot.yale.edu/docs/switzerland-ubs-restructuring-2008/. ↩
14. Swiss National Bank, press release of 26 November 2008 on the domicile and structure of the special purpose vehicle, https://www.snb.ch/public/asset/en/www-snb-ch/publications/communication/press-releases/2008/pre_20081126_2/publications0_en/pre_20081126_2.en.pdf. ↩
15. Mombelli, swissinfo.ch, 16 October 2018 (as above), which refers to the planned transfer to a special purpose vehicle in the Cayman Islands. ↩
16. Swiss National Bank, press release of 26 November 2008 (as above). ↩
17. Swiss National Bank, press release of 3 April 2009, “SNB StabFund concludes transfer of UBS assets”, copy at https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=3189&context=ypfs-documents2. ↩
18. Swiss National Bank, press release of 16 August 2013, “SNB StabFund repays Swiss National Bank loan”, https://www.snb.ch/public/publication/en/www-snb-ch/publications/communication/press-releases/2013/pre_20130816/publications0_en/pre_20130816.en.pdf. ↩
19. Hess and Gerber, Die Volkswirtschaft, 1 December 2008 (as above). ↩
20. politchronik.swiss (Année politique Suisse), “Krise auf dem amerikanischen Hypothekenmarkt 2007–2008”, https://politchronik.swiss/de/prozesse/15091-krise-auf-dem-amerikanischen-hypothekenmarkt-2007-2008. ↩
21. Swiss Federal Council, Anwendung von Notrecht, report of 19 June 2024, section 5.1 “UBS-Rekapitalisierung (2008)”, https://www.newsd.admin.ch/newsd/message/attachments/88222.pdf. The ordinance was published as AS 2008 4741. ↩
22. Yale Program on Financial Stability, “Switzerland: UBS Restructuring, 2008” (as above), which refers to Articles 5 and 9 of the National Bank Act. ↩
23. Swiss Federal Council, Anwendung von Notrecht (as above), section 5.1 on the duration of the ordinance. ↩
24. Andreas Kley, “Die UBS-Rettung im historischen Kontext des Notrechts”, Zeitschrift für Schweizerisches Recht (ZSR) 2011 I, pp. 123–138, https://www.uzh.ch/cmsssl/ius/dam/jcr:00000000-3d12-7c07-ffff-ffff9899cd61/UBS_ZSR_2011.pdf. Kley notes that the ordinance of 15 October 2008 relied on Articles 184 paragraph 3 and 185 paragraph 3 of the Federal Constitution because the Federal Council considered the time too short to create a statutory basis by urgent legislation (p. 133). He concludes that “[e]ine Regierung, die mehrfach und vielfältig Notrecht für ihre Tätigkeit beansprucht, ist nicht etwa eine starke, sondern eine ausgeprägt schwache Regierung” (p. 137). ↩
25. Swiss Federal Council, Anwendung von Notrecht (as above), conclusions. ↩
26. Swiss Federal Banking Commission, Jahresbericht 2008 (as above), which records that the package was presented to Parliament on 5 November 2008. ↩
27. politchronik.swiss, “Massnahmenpaket” (as above), account of the National Council debate. ↩
28. politchronik.swiss, “Krise auf dem amerikanischen Hypothekenmarkt 2007–2008” (as above), account of the Council of States debate. ↩
29. politchronik.swiss, “Krise auf dem amerikanischen Hypothekenmarkt 2007–2008” (as above), section on the positions of the parties. ↩
30. esisuisse, “Geschichte”, https://www.esisuisse.ch/de/ueber-uns/geschichte. The EBK annual report for 2008 (as above) adds that deposits of pension foundations received special protection until 31 December 2010. ↩
31. Hügli, cash.ch, 3 October 2018 (as above). ↩
32. Business Standard (Bloomberg), 17 October 2008 (as above). ↩
33. FINMA, Finanzmarktkrise und Finanzmarktaufsicht (as above). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.