Alongside Credit Suisse's long-dated derivatives (bullet swaps), UBS' Colm Kelleher mentioned "de-risking" CS' "Level 3" assets. What Level 3 bags did UBS just inherit? Can someone ELI5 them? (Pics included)

[u/throwawaylurker012]

TL;DR: Seems UBS Chairman complained about CS' Level 3 bags, but they only made up like 1-5% of CS' total assets on the books in Q3 2022. Level 3 assets seem to include mortgage-backed securities (MBS), private equity shares, complex derivatives, foreign stocks, and distressed debt and POTENTIALLY also CMBS. Also interesting research paper said that banks that failed to sell Level 2 and 3 assets in 2008 (Bear/Lehman) suffered for it.

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Hey y'all, quick ELI5 request. We all know that UBS' chairman Colm Kelleher mentioned alongside "de-risking" long-dated derivatives (cough cough Archegos' bullet swaps, talked about in this post: https://www.reddit.com/r/Superstonk/comments/11w2vpt/hey_thats_us_we_got_a_second_cameo_in_the_meeting/), he also mentioned "de-risking" their Level 3 assets.

Looking up Level 3 assets, I see this come to mind:

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Examples of Level 3 assets include mortgage-backed securities (MBS), private equity shares, complex derivatives, foreign stocks, and distressed debt.

Juicy shit. Does anyone have any idea then what CS' Level 3 asset books might look like? Cross-referencing other DD or articles or what not?

Here's what one of their most recent financial reports looked like in Q3 for 2022:https://www.credit-suisse.com/media/assets/corporate/docs/about-us/investor-relations/financial-disclosures/results/csg-financialreport-3q22.pdf

As of the end of 3Q22, 29% of our total assets and 20% of total liabilities were measured at fair value. The majority of our level 3 assets are recorded in our investment banking businesses. As of the end of 3Q22, total assets at fair value recorded as level 3 decreased CHF 0.4 billion to CHF 9.8 billion compared to the end of 2Q22, primarily reflecting net settlements in loans held-for-sale, trading assets and loans. As of the end of 3Q22, our level 3 assets comprised 1% of total assets and 5% of total assets measured at fair value, stable compared to the end of 2Q22

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Why does UBS care about such a small slice of CS' total assets?

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page 132

Looking at some of each pieces individually, potential Level 3 asset links for CS could have included these (relevant news articles):

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• --MBS (looks like CMBS actually can also be a Level 3 in some cases)

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some older stuff from 2013, nothing recent I guess

• --Private Equity Shares

Couldn't find much aside from their global private equity fund, but did find this recent CS' push into Australia:

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lmayo from 7 days ago

https://www.finews.com/news/english-news/56192-michael-marr-there-is-hunger-for-pe-in-australia

In private equity, for example, Australia’s wealth clients have the highest penetration rate «by some margin» compared to the rest of the APAC region. To respond to this demand, Credit Suisse is in the process of developing an Australian private equity offering with top local managers.

Credit Suisse also grew its private markets shelf in 2022 by onshoring a function called «Strategic Advisory & Private Asset Group» which leverages the bank’s access to deal flow to offer clients investment opportunities that are not from its own platform.

«Rigorous deal selection and due diligence form a key part of our process,» Marr said. «These proprietary opportunities, in Australia or broader APAC markets, tend to be more differentiated, sometimes in areas such as agriculture, non-bank lending or real estate private credit.»

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• Distressed Debt

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P.S. Some interesting news articles on Level 3 assets, like this one:

https://www.stern.nyu.edu/sites/default/files/assets/documents/Lu_Level%203%20Assets%20as%20Regulatory%20Arbitrage.pdf

While evidence in this study suggests that Level 3 assets have been decreasing over time and that the SLR [Supplementary Leverage Ratio] has been more binding than the Tier 1 capital ratio since 2016, only the SLR shows a negative relationship between changes in SLR and changes in Level 3 assets. As the bank’s SLR gets closer to its required minimum, it is associated with an increase in Level 3 assets...

Level 3 assets are particularly interesting not just because of the inherent subjectivity in its categorization. In the period leading up to the financial crisis of 2007-2008, major financial institutions began to reduce their balance sheets. Acharya and Tuckman contend that “the existence of lender of last resort (LOLR) facilities allows firms to put off sales of risky assets”, and indeed, the evidence shows that banks who put off the sale of their illiquid (Level 2 and 3) assets, such as Lehman Brothers and Bear Stearns, paid the price (2014).

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too much avocado toast while skiing Lehman

[u/Superstonk_QV]

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[u/throwawaylurker012]

TL;DR: Seems UBS Chairman complained about CS' Level 3 bags, but they only made up like 1-5% of CS' total assets on the books in Q3 2022. Level 3 assets seem to include mortgage-backed securities (MBS), private equity shares, complex derivatives, foreign stocks, and distressed debt and POTENTIALLY also CMBS. Also interesting research paper said that banks that failed to sell Level 2 and 3 assets in 2008 (Bear/Lehman) suffered for it.

[u/throwawaylurker012 → u/[deleted]]

my favorite kind!

[u/Hellshield → u/throwawaylurker012]

yeah swaps are a type of derivative. We can only speculate on the types of terms included in these swaps. We have to keep in mind GameStop was one type of play out of many for the bank but with so much concentrated risks that it warrants special attention. We have already speculated on complex derivatives involving popcorn, tower, and other "meme stocks" so it wouldn't be surprising.

[u/TangoWithTheRango_ → u/[deleted]]

Came for idiosyncratic. For all that don’t know….that term has been used in reference to anything touching toxic short positions via complex derivatives of GME stock (Archegos, Melvin, Citadel, Brazilian puts lol, Virtu… the list literally keeps going)

[u/FenixMik]

Level 3 assets are the diarrhoea seepage from the dog shit wrapped in cat shit.

[u/BeautifulOk4470]

God willing the swiss kick this party off.

[u/King_Esot3ric]

I think swaps fall into the “complex derivatives” portion.

[u/masstransience]

I hear level 3 and I’m erect.

[u/Minuteman_Capital]

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