To The Moon

With Credit Suisse, investors just got their first, messy view of what happens when a big global bank fails in the post-2008 era.

UBS agreed to buy its local rival over the weekend in a historic deal brokered by Swiss regulators. Credit Suisse shareholders will get UBS shares that were worth the equivalent of about $3.25 billion before the market opened on Monday, and less after the acquirer's stock fell about 5% on Monday morning. Credit Suisse had a market value of some $8 billion at the end of last week and a tangible book value of $45 billion.

The first lesson here is that the latter number, which investors use as an anchor of sorts for a bank's worth, isn't so tangible after all. UBS agreed to buy Credit Suisse at 7% of tangible book value -- a level that sounds like it would give the buyer an enormous margin of safety, in Benjamin Graham's timeless phrase. The deal will theoretically increase the acquirer's own tangible book value per share by 74%.

Yet UBS still wasn't comfortable without the Swiss authorities backstopping the valuation. It will absorb the first 5 billion Swiss francs, equivalent to about $5.4 billion, of any write-downs on the book; then the Swiss government will take the next 9 billion francs. If losses are even greater than that, the parties will split them.

This is striking because the value of Credit Suisse's assets wasn't the primary worry here, as it might have been in the 2008 banking crisis when banks had loaded up on toxic property-backed securities. Credit Suisse's immediate problem was that it was losing customers, creating a liquidity crisis. Yet the deal UBS has negotiated betrays deep worries that its peer is also insolvent, with liabilities worth more than its assets.

"The real challenge is the rundown of the investment banking activities, " UBS Chief Executive Ralph Hamers said on a call with analysts Sunday evening. To spell it out, UBS might find that Credit Suisse's theoretical $45 billion in tangible book value -- the net result of about $571 billion in total assets minus $522 billion in liabilities and a few billion of intangible assets -- gets lost in the mix as the balance sheet gradually shrinks.

A key swing factor for UBS stock will be how this math shakes out over the coming years. Investors' first reaction was to fear the worst: They knocked almost $8 billion off its market value at the open on Monday, much more than the $5.4 billion level at which the government backstop kicks in. By lunchtime in Europe, heads were cooler and the fall amounted to about $2.9 billion.

Another lesson in this deal is that bonds in a bank rescue can be riskier than stocks, overturning the traditional financial hierarchy. While Credit Suisse's shareholders will come away with some UBS shares, holders of its so-called bail-in bonds -- securities designed by regulators after 2008 to absorb losses in a crisis -- will be wiped out. Investors fled banks' bail-in bonds across Europe on Monday.

One of the curiosities of Credit Suisse's failure is that the bank has little in common with Silicon Valley Bank or the other midsize U.S. banks that have got into trouble. While SVB had an investment securities portfolio with more than $15 billion worth of paper losses in the held-to-maturity portion of the book, Credit Suisse had unrealized losses on its held-to-maturity securities of less than $50 million -- a virtual invisibility.

Instead, the sum of Credit Suisse's many issues boiled down to the fact that it was losing billions each year. To plug the leak it would need to either find a way to keep raising capital or shrink itself. Last year, it sought to buy time for a plan that would lead to carving out its investment bank. But time ran out as the U.S. banking crisis of confidence spread. Credit Suisse recently faced as much as $10 billion in daily customer outflows, The Wall Street Journal reported.

But those outflows point to one common thread on both sides of the Atlantic: Digital banking makes it much easier for customers to pull their money out, and digital communication can magnify the damage. Credit Suisse's liquidity problems started with whispers on social-media platforms last fall that eventually snowballed into a self-fulfilling prophecy. It didn't matter that the company had robust capital and liquidity levels according to the measures favored by regulators since 2008. Its common-equity Tier 1 capital ratio, today's most widely cited measure of capital adequacy, was 14.1% at year-end, similar to UBS at 14.2% and below those of many large peers.

Credit Suisse's story is different from SVB's, but digital technology played a startling role in the fall of both companies. Bank regulators' next challenge might be to factor into their thinking this new source of instability. For investors, it is another reason to mistrust bank book values: When things move fast, liquidity and solvency become hard to tell apart.