To save Credit Suisse, the Swiss authorities violated their own rules twice: the first time when they imposed the forced sale of the historic bank to its rival UBS without going through the shareholders’ vote; the second when they chose to favor the rescue of shareholders over that of bondholders, even if they own the riskiest bonds.
It could be a time of no return, it has never happened before. Up until now they paid for the shares first, then the bonds. Now the Swiss precedent threatens a 250 billion dollar market globally. This is why the European authorities have hastened to repeat the hierarchical order in which shareholders and bondholders of a bank are called to contribute in the event of a public bailout, after 16.3 billion At1 bonds were written off in the case of Credit Suisse ( additional Tier 1), saving the shareholders, primarily the Saudi National Bank and the Qatar Authority. «Common equity instruments (Cet1) are the first to absorb lossese and only after their complete use is the write-down of the At1 bonds required. This approach has been “consistently applied in the past” and “will continue to guide the actions of the SRB and banking supervision in crisis interventions”.», wrote the ECB, the EBA and the Single Resolution Committee (SBR) in a joint note. The Bank of England has followed suit, reaffirming the hierarchy of the order in which stakeholders are called upon to contribute to the bailout.
Under the terms of the agreement, Credit Suisse At1 bondholders get nothingthere, while shareholders get one UBS share for 22.48 Credit Suisse shares, an exchange that values the stock at 0.76 Swiss francs, compared to last Friday’s closing of 1.86. In total about 3 billion francs against the 7.4 billion of capitalization: little, but better than zero.
A shocking choice that could push the holders of the zeroed At1 bonds to sue. The law firm Quinn Emanuel Urquhart & Sullivan has assembled a team of lawyers from Switzerland, the United States and the United Kingdom who are already in discussions with some Credit Suisse bondholders about the possible legal actions available to them. A call for bondholders could be convened as early as tomorrow, during which representatives of Quinn Emanuel will outline the potential recourses that bondholders should consider.
If Cs bondholders are on a war footing, all other investors are scared and this increases market volatility. Therefore, after the ECB supervision criticized the choices of the Suisse National Bank, the Swiss central bank, the president Christine Lagarde looks beyond. We are monitoring market developments and are ready to respond if necessary to preserve price stability and the financial stability of the euro area», he affirmed during a long hearing in the European Parliament. Underlining that “the euro area banking sector is resilient, with strong capital and liquidity positions” and “the ECB’s monetary policy toolkit is fully equipped to provide liquidity support to the euro area financial system euro, if necessary, and to preserve the correct transmission of monetary policy”.