Retail Investors and Asian Investors in Panic as $17 Billion in Bonds Eliminated
In case you missed Part 1 and Part 2 of our series on the Credit Suisse bailout, please click here and here for a full recap. Now, read on for the final part of our investigation into what really happened. Former Credit Suisse CEO has warned that the Swiss authorities’ decision to impose losses on certain bondholders of Credit Suisse will make life more difficult for European banks. In a Financial Times column, he argued that the precedent of forcing investors who bought $17 billion in Additional Tier 1 bonds to take losses, instead of stock owners, could increase funding costs for lenders on the continent. This could have a negative impact on the competitiveness of the European banking sector, with U.S. and Asian rivals potentially emerging stronger. The cost for credit default swaps has also increased, particularly for subordinated debt. The decision has caused affected bondholders to consider taking legal action. We feel heartbroken over his statements. We can confirm that some of the bankers we knew at Credit Suisse were good people, but they had left the bank long before the collapse. It’s best not to say anything about the people who were involved at the end. They were always described with a single word by us. It began with a banker with a Polish name who was just arrogant and stupid or an Indian banker who usually resides in Geneva, who really was just dumb. It would be best if we didn’t say a word about a certain banker who somehow even managed to publish a book. He really was the embodiment of prepotency, arrogance and stuffed stupidity, and now to part 3 of our series. In the aftermath of the financial crisis, regulators urged banks to better align compensation with risk-taking. The prevailing view was that large cash bonuses incentivized traders and executives to take large risks without considering the long-term consequences. Credit Suisse responded by paying a significant portion of banker bonuses through bonds that required a number of years before they could be cashed, putting traders and management at risk of bearing the brunt of any catastrophic failure. It is unclear if the employee bonds were completely wiped out during the transaction, as this has not yet been discussed. If bondholders were zeroed while employees were not, this would likely be a controversial outcome. It remains to be seen whether this occurred or not, but the situation at Credit Suisse is largely in line with the ambitions of regulators. As part of the sale to UBS, approximately $17 billion in AT1 bonds were eliminated, effectively reducing the debt burden on the new owner and potentially impacting risk-taking employees and bond investors who willingly invested in these securities.
During the credit crunch, regulators sought to protect bondholders from losses at all costs out of concern that such losses could cause contagion. This approach was highly controversial in Ireland, where the government guaranteed all bank bondholders at the expense of taxpayers. If bondholders are always shielded from losses, it raises questions about why they are paid a credit spread if there is no actual risk of loss. The most contentious aspect of the decision in this case was that bondholders were treated more severely than shareholders, and this has had ripple effects throughout the broader $260 billion AT1 market, which is the most significant test yet of a regulatory framework that has largely gone untested until now. Recently, regulators such as the European Central Bank stated that they would not handle failing banks in the same way as the Swiss method. This announcement was made after concerns in the bond market caused the Single Resolution Board, along with the European Banking Authority and the European Central Bank, to release a statement clarifying that common equity instruments would be the first to absorb losses in the event of a failing bank, with AT1 bonds only being written down afterward. The Bank of England also made a similar announcement. Swiss investors are now considering legal action after emergency measures were implemented, which prevented shareholders from voting on the merger transaction. The Ethos Foundation, speaking on behalf of pension funds and institutional investors, stated that the takeover was a significant loss for shareholders and the Swiss economy. So, who exactly owned these bonds, apart from some Credit Suisse executives? Retail investors generally do not invest in these bonds, except possibly through a fund. Many jurisdictions, such as the UK, prohibit retail investors from purchasing these bonds due to the associated risks. Bloomberg data shows that Pimco, Invesco, and Legg Mason are among the top holders of Credit Suisse’s AT1 bonds. The Financial Times reports that this type of debt is quite popular with investors in Asia, who appreciate the brand names of the issuers and the yields available. Last year’s Credit Suisse bond, which paid a 9.75 percent coupon, was particularly popular. According to reports, many Asian investors purchased the AT1s with borrowed money and were receiving margin calls on Monday. This caused panicked selling and pushed down AT1s issued by banks in Asia by between 2 and 10 points, depending on the country.
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