FT : Two views of AI and Big Tech

Big Tech’s AI business models
We’ve looked at charts like this before:



That’s capital expenditures at the five Big Tech companies that are making the biggest plays on artificial intelligence (Nvidia, as a chipmaker rather than a service company, is big too, but is in a different category). The pattern of increasing spending looks similar at all of them. But the scale of the increase is not similar. Here is the same chart, with each company’s spending scaled to where it was four years ago:


Microsoft has doubled its capital spending in order to compete in AI. Alphabet, Amazon and Meta have tripled theirs. And Oracle has pushed up spending elevenfold.

This difference in spending has had a correspondingly disparate effect on free cash flow at the five companies: 


At Microsoft and Alphabet, operating cash flow is growing strongly enough to keep free cash flow more or less steady in the face of higher capital spending. At Meta, cash flow has started to wilt (and is expected to wilt more next year). Amazon — where cash flow is always volatile — has seen a sharp downturn, too. Finally, Oracle has begun to burn cash outright.

Unhedged’s argument has been that the market, far from blindly throwing money at AI and Big Tech, is making distinctions that appear to be based on cash generation. This continues to play out recently, with Oracle shares getting badly beaten up and Meta’s struggling. Alphabet’s shares have been relatively resilient partly because they were previously oversold on concerns about the future of the search business. One might be surprised that Amazon’s shares have not been hit harder, given the fall in free cash, but it has long been a company that prioritises reinvestment over profit. 


The market has lost patience with Oracle and Meta. Might the same happen to the other three before long? In a recent piece, Jason Thomas of Carlyle argues that it might, saying that the five companies have moved from an asset-light/software model that deserves a high valuation to something like an industrial model. But they are still valued the same way:

When these companies were “asset-light,” paying 7x their accounting [book] value made a lot of sense; you don’t value a money printing machine based on the cost of the paper or printing press! But at current price-to-book ratios, when they acquire $100mn in data centre assets, shareholders are effectively asked to pay $1bn, on average, for the purchase. Does this make sense?

If we assume that the PP & E on balance sheet should be valued at cost and assign a 10x P/B multiple to the rest, these companies’ market caps would be roughly half of what they are today.

Perhaps this is too restrictive an assumption . . . But it does provide a framework to think about valuations in an era where previously “virtual” companies suddenly need to concern themselves with industrial era minutiae like capacity utilisation and depreciation rates

Harvard Business School professor Andy Wu takes something like the opposite view in a recent interview, arguing that, rather than fundamentally changing their business models, they have 

taken a shrewd and conservative strategy for AI. They positioned themselves well to benefit from the rise of AI, but they don’t stand to lose that much if AI grows slower than anticipated.

Microsoft has mostly outsourced AI to a third party, OpenAI . . . Amazon will support anybody’s AI model . . . Meta spent billions of dollars building an open-source AI model that they hand out for free to the world . . .  these companies don’t really think that core AI technology is a meaningful business in and of itself.

Instead, they’re focused on profiting from all the adjacencies to AI. I often use a gold rush analogy: OpenAI, Anthropic and xAI are out there digging for gold.

Nvidia is the consummate shovel seller, designing the chips needed by the gold diggers. And Meta is the consummate jewellery maker: Meta’s social media, advertising, wearables and metaverse businesses stand to benefit . . . Microsoft does a bit of shovel selling and jewellery making, but the key thing is they’re not stuck digging for gold.

Certainly, it’s plausible that Amazon and Microsoft and Google might make less money on their cloud computing than they ideally would like if AI growth slows or declines, but they would not end up in financial distress.

We might sum up Wu’s view by saying that while Big Tech’s data centre spending is significant, it is supplemental to the companies’ core business models, which remain “virtual” or asset-light. They are not making an existential bet on AI; they are spending to make sure that their core businesses can coexist with AI, should they need to. This implies that those core businesses should still be valued on high multiples of cash flows. 

I’m not sure where I land on this. A crucial question is how long the current highly elevated level of spending persists. Three years? Ten? Forever? As the timeline extends, it will become harder to argue that these are still, at core, virtual businesses (again, this point applies less neatly to Amazon, which has always straddled the industrial/virtual line). And it’s not clear anyone knows the answer to this question, because it depends on how the technology and the market for it evolves. The market is giving the benefit of the doubt to Big Tech, as Thomas points out. But again, it is not doing so indiscriminately, as the weak performance of Meta and Oracle shows.

FT : Putin’s retaliation threat over frozen assets rattles EU capitals

Putin’s retaliation threat over frozen assets rattles EU capitals
Italy, Belgium and Austria worry about Russia moving against their companies

Moscow’s threats to retaliate against western companies over the EU’s move to indefinitely freeze Russian assets have heightened concerns in some European capitals that remain wary of using the funds to support Ukraine.

The bloc last week agreed to keep €210bn of Moscow’s assets immobilised for the foreseeable future as part of plans to channel them into a €90bn loan to Kyiv over the next two years designed to help fend off Russian aggression and bolster Europe’s role in US-led peace talks.

Russia has promised “the harshest” response if its sovereign assets are used to fund Ukraine, in a threat that has alarmed countries including Belgium, Italy and Austria.

Though Moscow has not yet revealed what further steps it might take, officials have looked into seizing any remaining western assets in Russia, according to a person familiar with the plans.

President Vladimir Putin last month described the European plans as “property theft”.

Moscow’s threats come as EU leaders gather in Brussels on Thursday for a crunch summit to decide on funding to keep Ukraine solvent for the next two years, with Belgium continuing to resist pressure from other capitals to agree to the €90bn loan raised against the assets.

Belgium’s Prime Minister Bart De Wever has said the risk of Russian retaliation against his country, which hosts the overwhelming majority of the assets, is too great, and demanded that the EU’s other 26 member states provide financial and legal guarantees to share the burden.

Belgium is demanding “unlimited” guarantees in scope and duration, officials briefed on the last-minute negotiations have said, but other capitals have said that is impossible.

Ukrainian President Volodymyr Zelenskyy will attend the summit to make his case to De Wever personally, and EU officials have said the summit will last as long as it takes to reach a decision.

“This is existential for Ukraine,” said one senior EU diplomat involved in the negotiations. “So Belgium has to get on board.”

Russia’s central bank has already brought an Rbs18tn ($229bn) legal action in a Moscow court against Euroclear — the Brussels-based central securities depository that holds €185bn of Russia’s frozen sovereign assets. The first hearing is scheduled for mid-January.

The Kremlin has also drawn up a series of regulatory measures that would facilitate further seizures. 

Western companies had at least $127bn of assets in Russia as of 2024, according to research by the Kyiv School of Economics Institute.

The Kremlin has already seized or frozen assets of at least 32 western companies in response to earlier disputes, causing losses of at least $57bn, the KSE Institute said.

The assets, investment and dividends of companies that stay “are basically under control of Russia,” said KSE Institute director Nataliia Shapoval, adding that the companies are required “to give away their rights over the investment”.

Russia could seize western companies’ local subsidiaries under a decree Putin signed in September that introduces an expedited procedure for nationalisation. The Kremlin explained the decision as a way to quickly respond to “hostile acts” such as the EU seizing its assets.


Belgian officials believe that Euroclear would be the first victim of potential retaliation in Russia, as about €17bn of its clients’ assets are still immobilised there and at risk, according to people familiar with the matter.

“The use of immobilised assets at Euroclear could have potentially harmful consequences for this country and Europe as a whole,” De Wever told the Belgian parliament earlier this month.

Though 1,903 foreign companies have withdrawn from Russia or cut back their operations there since the start of the full-scale invasion of Ukraine nearly four years ago, 2,315 remain active in the country, according to the KSE Institute.

Those include the Russian branches of banks such as Austria’s Raiffeisen and Italy’s UniCredit, which have generated significant wartime profits they are unable to repatriate under a ban on dividend payouts. Foreign companies earned $19.5bn in profits in Russia last year, according to the KSE Institute.

Andrea Orcel, UniCredit’s chief executive, told an Italian senate hearing last month that the bank had no plans to pull out of Russia even though it had about €3.5bn of capital stranded there.

“If they nationalise me it’s a legal violation, and I maintain a credit with the Russian Federation in perpetuity,” Orcel said.

The Italian government last week backed the EU decision to indefinitely freeze the Russian assets, but also raised concerns about the potential risks of using them to fund Ukraine.

Italian senator Claudio Borghi from the far-right League party, a Russia-friendly pro-business partner in Giorgia Meloni’s coalition, has warned of the repercussions if the EU went ahead with its plans.

“How can you think that effectively stealing another country’s money will not lead to further disaster?” Borghi told the FT. “The first consequence is that Russia will feel free to confiscate all foreign assets.”

Austria is also concerned Moscow could move to seize Raiffeisen, the country’s largest bank, which reported revenue of $2.9bn in Russia last year.

“This is uncharted legal territory, and frankly, there is growing incomprehension about why the commission doesn’t just talk more to the member states and at least give them the feeling that their concerns are being taken seriously,” an Austrian official said.

The seizures could affect western investors who held publicly traded Russian securities before the invasion as well as western companies with stakes in Russian corporates or operations in the country.

After western countries froze about $300bn of Russia’s sovereign assets in the early days of the war, Moscow responded by barring western investors from selling their Russian securities and withdrawing the proceeds. Dividends and coupons are held in so-called type-C accounts under Russia’s control.

Russia has let some western investors withdraw some of the funds. But the type-C accounts have likely significantly grown in value since March 2023, when Russia disclosed that Rbs500bn ($6.3bn) in frozen western assets were held there, according to Alexandra Prokopenko, a former central bank official.

Sberbank, Russia’s largest bank, said it paid out about 25 per cent of its Rbs787bn dividend for 2024 to type-C accounts last year. The sums have continued to accumulate even though many western companies have written off the investments.

BP’s dividends from its 19.75 per cent stake in Rosneft likely total about Rbs340bn, Prokopenko said, while a 2024 court decision said JPMorgan had Rbs243bn in Russian assets “mainly” in type-C accounts.

“This is one of Moscow’s aces. If Europe makes a move on Russia’s reserves, Russia can just transfer funds from type-C accounts into the budget,” Prokopenko said. “It gives them a source of direct revenue when they’re running a deficit and overspending on defence.”

The move would also show Russia was “ready to take an eye for an eye”, she added. “Unlike Europe, the Kremlin can do that quickly without getting tangled up in court hearings.”


The Kremlin has also threatened to sue western governments, companies and individual investors in foreign courts.

Two dozen Russian oligarchs and corporates have already brought challenges to asset freezes and seizures through tribunals governed by investor-state dispute settlement mechanisms under international treaties. The Russian claims amount to at least $62bn, according to analysis by Friends of the Earth — an environmental campaign group.

“The point isn’t to win but to create risks, increase the costs, drag things out and demoralise” entities involved in the scheme to fund Ukraine, Prokopenko said. “The longer the lawsuits go on for, the longer the EU can’t make full use of the Russian assets.”

Belgium fears potential lawsuits under an investment treaty it has signed with Moscow, together with Luxembourg. Sanctioned oligarch Mikhail Fridman is already seeking $16bn in damages from Luxembourg for freezing his assets.

Lawyers hired by the European Commission have expressed doubt that Russia could successfully challenge the use of its sovereign assets under bilateral investment treaties.

Investment courts “lack jurisdiction to hear a dispute relating to alleged expropriation of Russia’s sovereign assets”, Covington wrote in a legal assessment seen by the FT. The law firm said the risk for EU member states to be dragged before other international courts “has been significantly exaggerated”.

The commission had also made it “extremely unattractive for third countries to co-operate with Russia on expropriation of European assets”, a senior commission official said.

Germany, the main driving force behind the frozen assets plan, has “made it clear again and again that the basic principle of this whole operation is that everyone bears the same risk”, another EU diplomat said. Berlin believed that using the Russian assets was the only way to continue to fund Ukraine without taking on more debt, the diplomat said.

“If it doesn’t work out, it is certainly a disastrous signal to Ukraine. Europe will then also fail as a geopolitical actor,” they added.

FT : New York hedge fund approached by Warner shareholder to buy CNN

New York hedge fund approached by Warner shareholder to buy CNN
Standard General’s Soo Kim is considering purchasing or investing in WBD’s television networks

A prominent New York investor has been approached by at least one major Warner Bros Discovery shareholder to acquire all or part of its cable television assets including CNN, said people briefed on the matter.

Soo Kim, founder of New York hedge fund Standard General, has been in talks over potentially buying or investing in the WBD television networks, said the people.

A veteran of distressed debt deals, Kim took stakes in troubled companies including RadioShack and American Apparel. Standard General has recently entered gaming through its takeover of the listed Bally’s casino chain and has done previous television network deals.

A cash infusion could boost the prospects of WBD’s cable assets, which are being spun off as part of the $83bn sale of the group’s studio and streaming assets to Netflix. The shareholder who approached Kim could not be immediately identified.

The potential transaction comes after WBD urged its shareholders on Wednesday to reject Paramount’s $108bn hostile offer to buy all of the media conglomerate.

Paramount has offered $30 a share in cash to WBD shareholders. However, WBD’s board said the Paramount bid was too risky and lacked secure funding. Paramount, which is led by chief executive David Ellison, has vigorously denied the claim.

The Netflix deal, which includes taking over HBO, is worth $27.75 a share in cash and stock. WBD has said its remaining television networks business could have an additional standalone value of a few dollars a share.

Paramount has disputed that valuation, noting that the cable business has a heavy debt load at a time when traditional TV viewership is shrinking.

A private equity backer like Kim could provide a vote of confidence and an infusion of capital for the cable business, which includes CNN, the Food Network and Discovery Channel. 

WBD on Wednesday said a number of potential buyers had expressed interest in its traditional TV assets, without giving the names of the interested parties.

Standard General has previous experience in television news. In 2010, it acquired a local network group, Young Broadcasting, out of bankruptcy.

It later combined Young Broadcasting with rival groups, eventually selling the roll-up known as Media General to Nexstar Broadcasting.

Backed with financing from US private equity group Apollo, Standard General in 2022 announced a near $9bn deal to buy Tegna, a local television group with scores of TV stations. After fierce political and regulatory opposition, the deal was terminated in 2023.

Kim, 50, had acquired the management contract for the Ferry Point municipal golf course in the Bronx, New York, from Donald Trump in 2024, paying tens of millions of dollars to the Trump Organization.

Bally’s this week was officially granted one of three licences for a New York City casino, which it intends to build at the Ferry Point site.

Kim declined to comment. WBD did not respond to a request for comment.

>>> OPtions : Term Structure : Iberdrola, Mercedes, Sanofi, Schneider Electric

  • Biggest increases in one-year vs three-month IV spread:
    • Sanofi term structure up 1.3 point to 0, in the 82nd percentile; stock fell 0.7% w/w (RSI: 39); skew in the 12th percentile
    • Mercedes term structure up 1.3 point to -0.3, in the 82nd percentile; stock fell 1.1% w/w (RSI: 55); skew in the 89th percentile
    • Ferrari term structure up 1.2 point to 0.6, in the 67th percentile; stock rose 0.3% w/w (RSI: 31); skew in the 25th percentile
    • Eni term structure up 1.1 point to 3.4, in the 100th percentile; stock fell 2.3% w/w (RSI: 39); skew in the 66th percentile
    • Iberdrola term structure up 1 point to 2.8, in the 89th percentile; stock rose 0.7% w/w (RSI: 53); skew in the 30th percentile
  • Biggest decreases in one-year vs three-month IV spread:
    • Rheinmetall term structure down 2.3 points to -2.4, in the 50th percentile; stock fell 5.2% w/w (RSI: 43); skew in the 64th percentile
    • Schneider Electric term structure down 1.2 points to -0.9, in the 57th percentile; stock fell 1.1% w/w (RSI: 46); skew in the 14th percentile
    • Wolters Kluwer term structure down 1.1 points to -3.4, in the 1st percentile; stock rose 2.8% w/w (RSI: 43); skew in the 13th percentile
    • Deutsche Post term structure down 0.9 points to 0.4, in the 85th percentile; stock rose 0.9% w/w (RSI: 63); skew in the 23rd percentile
    • Adidas term structure down 0.8 points to 0.3, in the 70th percentile; stock rose 2.2% w/w (RSI: 53); skew in the 17th percentile

(ZeroHedge) Uniformed Armed Guards Spotted On Russian 'Shadow Fleet' Vessels Off

Uniformed Armed Guards Spotted On Russian 'Shadow Fleet' Vessels Off Europe

Russia is upping the ante at a moment the US and some European countries are threatening action and new sanctions on vessels transporting Russian oil and gas to global markets, in defiance of Western sanctions.

Sweden's navy announced Wednesday it has spotted armed personnel in uniform providing security for vessels linked to Russia's so-called "shadow fleet" traversing main shipping routes in the Baltic Sea.

Russian-linked tankers in waters off northern Europe have of late been under threat of interdiction and boarding by European authorities. This scenario has actually happened within the last two years as these vessels came under suspicion of cutting undersea telecoms cables and other alleged sabotage activity.

The head of operations for Sweden's navy, Commodore Marko Petkovic, has been quoted by Swedish broadcaster SVT as saying the individuals observed aboard the tankers likely work for private security companies.

He also said that Russia's military has become "more permanent and more visible" in and near the Baltic Sea and the Gulf of Finland, with warship activity becoming more routine.

"The Russian Navy is periodically present at various hubs in the Baltic Sea, the Gulf of Finland and the Baltic Sea, and appears to be operating there in some way in support of this shadow fleet," Petkovic said.

But it should be noted that armed personnel aboard oil tankers should be seen as nothing new or alarming, given this is a regular practice among all countries and shipping firms especially off the eastern African coast, where piracy is a persistent threat.

Sweden in the instance of alleged Russian personnel aboard 'illicit' tankers is saying this is a new and provocative development in European waters, however.

Russia frequently deploys contractors to provide protection for assets and personnel abroad, just as the US and European countries do.


At this moment, Washington is mulling additional sanctions on Russian energy and shipping, and so threat of seizing tankers and cargo could grow - and this provides Moscow good reason to bulk up security on these ships.

The Information : The Memory-Chip Rally Lifting Micron Isn’t Done

The Memory-Chip Rally Lifting Micron Isn’t Done


The Takeaway
  • Micron, Samsung, SK Hynix stocks surged over 100% from AI chip demand.
  • High-bandwidth memory demand outpaces supply, boosting chipmakers’ margins.
  • Memory chip market leaders secure long-term contracts for future AI needs.

When Micron Technology reports its fiscal first-quarter earnings on Wednesday afternoon, investors will be listening for the memory chip maker’s outlook in the next few quarters. Micron is one of three companies, along with Samsung and SK Hynix, that make high-bandwidth memory, a key component of AI chips. Surging demand for AI chips has lifted memory chip revenues for all three companies in the past year or so.

That in turn has lifted all three stocks by more than 100% this year—Micron alone is up 165%. Given the seemingly limitless appetite for AI chips, demand for memory should continue to outpace supply for the next couple of years, which suggests that even after their recent run-up, these secondary beneficiaries of the AI boom should have more room to rise. The question now is how much more room the stocks have to run.

“AI spending is going to be strong next year, and memory is a clear area, kind of like storage drives, where you don’t have a ton of competitors and you don’t have a lot of capacity coming on,” said Gus Zinn, a Nomura portfolio manager who oversees the firm’s $6.7 billion science and technology fund.

High-bandwidth memory runs alongside a graphics processing unit—the AI chip, typically made by Nvidia—and helps pipe data to that processor faster and more efficiently. In addition to selling these memory components, Micron, Samsung and SK Hynix offer other data memory products that are useful in training and running AI models as well as for handling traditional cloud computing workloads and for use in smartphones and personal computers. The massive demand for HBM in AI data centers in particular has led to a shortage, allowing all three companies to raise their prices.

Doubling Density

The market for memory chips, including HBM, is highly concentrated: Micron, Samsung and SK Hynix together make up 94% of it, according to the latest figures from Counterpoint Research. And demand from AI chipmakers for memory capacity, sometimes referred to as density, has been steadily increasing as they churn out new generations of processors.

“Every generation of accelerators requires a lot more HBM. The density of HBM [per chip] has been pretty much doubling from generation to generation” if you look across the latest AI processors from Nvidia, AMD and Google, said UBS equity analyst Tim Arcuri.

HBM companies’ manufacturing capacity is nowhere near adequate to meet today’s demand. That’s likely one reason why OpenAI struck deals with Samsung and SK Hynix this fall to secure HBM chips for data centers associated with its Stargate project. OpenAI had already struck a deal to use Nvidia technology, which theoretically should include the HBM. But dealing directly with the memory chip makers could give the company more flexibility in the long term, making it easier to pair the memory with its own custom AI chips.

SK Hynix’s parent company in October said OpenAI’s demand alone will require the entire sector to double its capacity. Making enough memory chips to meet OpenAI’s needs could take anywhere from one to five years, said Kevin Krewell, a retired computing and deep tech analyst who spent more than a decade at Tirias Research.

And even if the pace of training new AI models slows down, demand for HBM chips could remain strong.

“Even if you’re not putting high-bandwidth memory or high-performance memory in the GPUs or the [other specialized AI chips], you still need the [central processing units] that are running the software, and those also require a significant amount of memory, as these large models take a lot of memory,” Krewell said.

The chipmakers’ pricing power has already lifted their profit margins. In the September quarter, Micron’s gross margin jumped to 46%, up 9 percentage points from a year earlier. A similar trend has played out at SK Hynix, which like Micron mainly focuses on selling memory and storage products.

Micron and SK Hynix have both been growing their top line by more than 30% in each of the last several quarters. Wall Street analysts polled by S&P Global Market Intelligence expect that pace of growth to accelerate for both companies next year. They project that Micron, for one, will grow its revenue by 58% in its fiscal 2026, which ends in August. In fiscal 2027, the analysts predict that Micron’s growth will slow to 18% but its gross margin will jump higher again that year to 57%, a level it hasn’t reached since 2018.

Samsung’s gross profit margin has also risen with the latest boom in demand for its memory chips, but less than the margins for the other two. It is overall growing much more slowly. That’s because at Samsung, chips make up less than half of sales, with consumer electronics such as smartphones and TVs contributing the rest. But even for Samsung, the AI memory shortage is a notable catalyst: The company’s semiconductor device solutions division, which includes its memory chip business and a chip manufacturing foundry, contributed 58% of its operating profit in the September quarter, up from 42% a year ago.

The Next Six Months

To be sure, the companies’ shares aren’t cheap after their rally this year. Each is trading slightly above its respective average multiple of forward earnings before interest, taxes, depreciation and amortization over the last decade. Micron currently trades at seven times next year’s Ebitda, and the other two trade at around four times. But their valuations today look more attractive than in mid-2023, when Micron and SK Hynix traded at around 15 times and had negative gross margins as a result of overbuilding capacity to meet surging pandemic demand. Arcuri of UBS is betting that memory chips’ usefulness to AI will mean their makers can maintain better pricing power than ever before.

“The whole thing about Micron is it has been uber-cyclical, so you pay a super-low multiple off of a high earnings number. That’s changing, because it’s becoming less cyclical,” he said. (Arcuri has a “buy” rating for Micron, but he doesn’t cover the other two firms, which are based in South Korea.)

Long-term contracts should insulate the memory chip makers from any near-term slowdown in AI chip demand, Arcuri added. “Nvidia, AMD and Google are all procuring HBM at least a year, in some cases two years out, and locking in volume and pricing.”

Nomura’s Zinn is holding on to a position in Micron, which he acquired more than a year ago. He also added a position in Samsung to his portfolio a few months ago. Samsung, he argued, has a long-term advantage in its foundry business, which makes it one of just a few companies in the world besides Taiwan Semiconductor Manufacturing Co. that can produce large numbers of semiconductors. Samsung this year restored its dual-CEO structure and is starting to get “back on track” after falling behind its peers technologically, Zinn noted.

Still, “the whole storage market is in a giant bull market,” he said. Trying to pick one winner among the stocks that make data storage and memory chips doesn’t make sense, he said, because “they’re all great, and they’re all kind of the same trade.”

Expectations are high ahead of Micron’s upcoming earnings report on Wednesday. Micron has projected 44% year-over-year revenue growth, but the consensus among analysts is that revenue will grow 48% to $12.88 billion, according to S&P Global Market Intelligence.

Besides cooling AI demand, the other long-term risk for the memory makers is that down the line they could end up adding so much excess capacity that prices have to come down. For now, that scenario looks to be a ways off, so it’s not too late to get in on the memory trade, Zinn said.

So when would Zinn consider selling his shares in Micron, which he’s owned for over a year?

“I don’t like to think about it in terms of stock price, but more in terms of time,” he said. “I think the spending and AI in memory and all these areas that we’ve been talking about is going to be strong next year, so I feel pretty good owning it for the next six months.”

FT : How a Swiss compromise could save UBS billions

How a Swiss compromise could save UBS billions
A proposal from a cross-party group of politicians could break the deadlock with the country’s biggest bank

Nearly two years after the Swiss government first proposed significantly increasing the capital requirements of UBS — igniting a heated dispute with the country’s largest bank — there are signs that the debate is finally moving in a more amicable direction.

A cross-party group of Swiss politicians last week laid out a set of compromise proposals, which recommended considerably watering down the government’s original plans. In doing so, the lawmakers have presented a roadmap that has been cautiously welcomed by the bank and could break the deadlock between the two sides, according to analysts.

Here is how their compromise could work:

Foreign subsidiaries
Switzerland’s seven-member federal council — the country’s executive branch — proposed in June to increase the bank’s capital requirements by up to $26bn in an attempt to mitigate the risk of another Credit Suisse-style collapse. UBS acquired its crosstown rival in a state-orchestrated rescue in March 2023.

The “too big to fail” reforms centre around forcing UBS to fully back its international subsidiaries with capital at the parent bank, a move that the government said would require the lender to have about $23bn in additional loss-absorbing capital.

At present, UBS is only required to match 60 per cent of the capital at its international subsidiaries — such as the US and UK — with capital at the parent bank.

Under the government’s proposal, UBS would only be allowed to use common equity tier one (CET1) capital — the most expensive form of bank capital — to meet the requirement to fully capitalise its foreign subsidiaries.

However, the lawmakers proposed allowing UBS to use additional tier one (AT1) debt to cover up to half of the capitalisation of its foreign units, significantly reducing the overall capital hit.

CET1 capital — primarily ordinary shares and retained profits — is the highest-quality capital a bank has. It is used as a bank’s primary buffer to absorb losses and typically does so first in a time of crisis, making it the most expensive type of bank capital.

AT1 bonds are debt issued by banks that sit below CET1 in the traditional capital hierarchy and convert into equity or are written down when a lender runs into trouble. Because AT1 debt usually absorbs losses after CET1, investors face less risk, making AT1s a cheaper form of capital. In its third-quarter results, UBS disclosed $74.7bn in CET1 capital and $20.3bn of AT1 debt.

Kian Abouhossein, a senior equity analyst at JPMorgan Chase, estimated that under the lawmakers’ proposal to allow UBS use AT1 debt to cover up to 50 per cent of the capitalisation of its international units, UBS would only need to raise an additional $400mn in CET1 capital.

This compared with an estimated $20.4bn under the Swiss government’s proposal to fully deduct its foreign subsidiaries only through CET1 capital. Abouhossein added that the compromise scenario would require UBS to raise about $16bn in new AT1 debt.

“Getting 50 per cent of subsidiaries backing in AT1 instead of CET1 has a huge impact,” said Jérôme Legras, a managing partner at Axiom Alternative Investments, which is an investor in UBS. “It would bring the required CET1 amount very close to [UBS’s] current level.”

Switzerland’s chequered history with AT1s
The proposal to allow use of AT1s to boost UBS’s capital position is likely to raise eyebrows, following Switzerland’s controversial treatment of the instruments in the Credit Suisse takeover in 2023.

The UBS-Credit Suisse deal, which was orchestrated by the Swiss government, upended the traditional hierarchy among bank creditors by imposing losses on bondholders while allowing equity investors to recover $3.3bn.

A Swiss court ruled in October that regulators’ decision to wipe out SFr16.5bn ($20.7bn) of Credit Suisse AT1 bonds was unlawful, but stopped short of determining whether investors should be repaid. Swiss financial regulator Finma and UBS are appealing against the ruling. However, bondholders are exploring ways to push for a settlement with UBS.

“If this goes through, we’ll end up in a funny scenario where most of the recapitalisation would come from the instrument that has been criticised so much: AT1s,” said Legras.

Asset valuation
The other key part of the government’s “too big to fail” reform package related to strengthening the quality of UBS’s capital base, namely by tightening how banks quantify items such as deferred tax assets (DTAs), in-house software and other hard-to-value items on their books.

This proposal in effect redefines what counts as capital for UBS, wiping out about $11bn by discounting the value of software and DTAs.

The government said these changes would add about $3bn to the capital requirements of UBS’s parent bank, but some analysts have estimated that the impact to the wider group could be as high as $11bn.


The lawmakers’ compromise proposal recommended that Swiss banks should only be required to follow international rules for most hard-to-value assets, in effect pushing for the government to abandon its proposals in this area.

It said the treatment of bank software should comply with EU rules, while DTAs should continue to be treated according to EU, UK, US and Basel III regulations.

“The distance to the rules of leading financial centres in the EU, UK, USA, and Asia must never be so great that [Swiss] competitiveness is compromised,” the cross-party group of lawmakers said.

Investment bank cap
The final recommendation in the lawmakers’ plan was to cap the size of UBS’s investment bank at 30 per cent of its risk-weighted assets.

The investment bank already has a self-imposed limit of 25 per cent of UBS’s RWAs, as the Swiss bank’s business model is much more heavily geared towards its comparatively stable wealth management business than its riskier trading and dealmaking activities.

Executives at the bank have indicated that they would be in favour of a permanent cap. The lawmakers said UBS should face “discretionary capital surcharges” if it was to exceed this limit.

What next?
The saga over UBS’s capital position has weighed heavily on the bank’s share price. Since the proposals were first mooted in April 2024, the stock has only climbed by about a quarter compared with a 150 per cent rise in the wider Euro Stoxx Banks index, which tracks the largest lenders in the Eurozone.

The cross-party composition of the politicians proposing the compromise capital plan has buoyed analysts and investors. The four parties involved represent a majority of lawmakers in both houses of parliament.

This is important because the changes to foreign subsidiaries — the main part of the reform package — is subject to parliamentary approval. A public consultation on these reforms closes in early January, with the parliamentary process expected to start during the second half of 2026.

Meanwhile, the reforms around the valuation of assets will be decided by the federal council via an executive ordinance. A decision is expected during the first six months of next year.

Andreas Venditti, an analyst at Vontobel, cautioned that there was no certainty that the parties involved in the compromise proposal could guarantee unanimous support within their parliamentary ranks.

However, he added that the plan could accelerate the parliamentary process and reduce the uncertainty hanging over UBS.

“If everyone agrees, this could potentially be solved by the end of next year.”

Others are also cautiously optimistic. JPMorgan’s Abouhossein said the proposal “moves the debate in a helpful direction”, while Axiom’s Legras said: “It looks like we’re getting closer to the finish line.”

FT : Carmakers sour on EU’s ‘disastrous’ petrol engine rule changes

Carmakers sour on EU’s ‘disastrous’ petrol engine rule changes
As details have become clearer, executives warn the easing of the combustion engine ban would lead to more expensive vehicles

The car industry has soured on the EU’s plan to ease the 2035 ban on combustion engines as details have become clearer, with some executives warning the “disastrous” changes would lead to more expensive vehicles.

Brussels said on Tuesday it would scrap a law forcing carmakers to cut their emissions to zero by 2035. While carmakers will be allowed to carry on releasing 10 per cent of their 2021 emissions and to continue selling some petrol engines and hybrids, the European Commission has mandated that the emissions be offset by using low-carbon steel and sustainable fuels.

The softening of the 2035 ban was meant to be a hard-won victory for carmakers after months of intense lobbying. Although it was initially welcomed by some carmakers, many companies said the offsets would be too challenging to bring in since the required use of green steel and “made in Europe” content in vehicles would be complex and expensive.

“In times when European economic strength is crucial, this entire package from Brussels is disastrous,” said Hildegard Müller, president of the German car lobby VDA. “What appears to be greater openness is fraught with so many obstacles that it risks remaining ineffective in practice.” 

Stellantis, the European group behind the Jeep, Fiat and Peugeot brands, said the proposals failed to address the challenges in the electric transition for light commercial vehicles and did not include enough flexibility to meet emissions targets in 2030. 

“The introduction of technology neutrality through the revision of the 2035 CO₂ reduction target is an important step but, as currently proposed, it will not support the production of affordable vehicles for the vast majority of customers,” it said.

Auto industry analyst Matthias Schmidt predicted petrol cars would “become haute couture Swiss watches of the motor industry” with the added costs of green steel and renewable fuel priced in.

The French car industry body, the Plateforme automobile (PFA), has adopted a more measured approach to the package, saying that the policies “represent an initial response to the urgent challenges facing the European automotive industry today”.

France, which had pushed for “made in Europe” protections that are set to be announced in January, was broadly reassured by the measures, one industry expert said, although the PFA wants to see more flexibility for vans and on 2030 emissions targets.

In a sign of deep division among EU member states, negotiations over the revision, particularly on whether full combustion engines should still be allowed after 2035 and on national targets to electrify corporate fleets, ran down to the wire on Tuesday. 

A senior EU official said the offsets for the final 10 per cent were a “pretty strong compromise” given heated politics around the easing of the ban, which has been heavily lobbied by industry and countries such as Germany, Italy and the Czech Republic.

Manfred Weber, the Bavarian leader of the conservative European People’s party, the European parliament’s largest political group, had claimed victory on Friday, saying the Commission would put forward “a clear proposal to abolish the ban on combustion engines”, without mentioning conditions for green steel and renewable fuel.

Chris Heron, secretary-general of E-Mobility Europe, a trade association, estimated that the changes meant that plug-in hybrids and other petrol vehicles could account for more than a quarter of new car sales in Europe based on preliminary estimates.

“By reopening the door to plug-ins, hybrids and unscalable biofuels, we risk slowing ourselves down in a highly competitive global race,” Heron said.

The proposal setting binding national EV ratios for zero emissions corporate vehicles was among the most contested elements, EU officials said. A draft list of targets showed that Germany was originally expected to run an entirely electric corporate fleet after 2035 but after negotiations on Tuesday, the goal was reduced to 95 per cent.

EU officials said the corporate fleets proposal was critical to maintaining the bloc’s ambitions for cutting emissions in the road transport sector, which accounts for about 20 per cent of the total, because it would expand the second-hand market for electric cars. 

“A great aspect is that it brings these vehicles to the second-hand market much faster,” one official noted, adding that about 80 per cent of EU citizens buy cars second-hand.

But Richard Knubben, director-general at Leaseurope, which represents Europe’s leasing and automotive rental companies, warned that limiting financing options for companies and the lack of incentives for EV uptake meant that the corporate fleets rules were “likely to make a difficult situation worse for the manufacturers”.

FT : Berlin launches ‘Germany Fund’ to lure private equity investors

Berlin launches ‘Germany Fund’ to lure private equity investors
Initiative aims to raise €130bn in investments amid growing interest from firms including KKR and Apollo

Friedrich Merz’s government is launching a “Germany Fund” to attract up to €130bn in private investments for higher-risk projects, a move designed to supercharge a massive public infrastructure and defence spending drive aimed at reviving the German economy.

The so-called Deutschlandsfonds, which will be anchored in state development bank KfW and led by its chief executive Stefan Wintels, would be seeded with about €30bn in public money and loan guarantees, according to two people with knowledge of the matter.

It will offer an array of investment vehicles and projects to channel private funds into sectors including tech and defence start-ups, energy infrastructure and critical minerals projects. An official announcement by the finance and the economy ministers is scheduled for Thursday.

The initiative is part of efforts by the ruling coalition to pull Europe’s largest economy out of stagnation, as it battles high energy prices and fierce Chinese competition in its traditional export markets.

Stagnation and deindustrialisation are also fuelling support for the far-right Alternative for Germany party, which won more than a fifth of seats in parliament in elections earlier this year.

Since taking office in May, Merz has set out plans to inject more than €1tn in public spending over the next decade to renovate Germany’s dilapidated infrastructure and upgrade its neglected armed forces. But his government was also seeking to attract private capital to amplify the growth effect, according to government insiders.

“We have done a lot in terms of unlocking funds for public infrastructure and the military, but Germany needs much more and we can’t just rely on public money,” said economist and finance ministry adviser Jens Südekum.

The idea was to facilitate debt financing for projects banks are reluctant to fund, he said, referring to a lithium mining project in Saxony, which just received federal state support.

One of the people with knowledge of the details said US private equity fund managers KKR and Apollo had recently met German officials in Berlin to express an interest in investing in the country.

The finance ministry declined to comment on the details.

Start-ups have long complained that the lack of capital was pushing them to seek funds and list abroad. The Germany Fund initiative was a “step in the right direction”, said Verena Pausder, head of Germany’s start-up association.

Merz’s government has sought to put the finishing touches to a series of reforms before the end of the year. This week, the cabinet approved a plan to encourage Germans to tap capital markets to boost their private pensions. From next year, it will offer all six-year-olds €10 a month until the age of 18, which their parents will be able to invest in state-backed savings accounts.

After some coalition infighting between Merz’s Christian Democrats and its Social Democrats partner, the cabinet also agreed on speeding up planning permits for infrastructure projects, which have often been blocked by stringent environmental rules. But the big test will come next year, with a planned overhaul of the country’s costly pension system and health insurance.

“We will also have to make further structural reforms next year so that our economy becomes competitive again, because we’re still a long way off where we really need to be,” Merz told parliament on Wednesday.