(Reuters) Credit Suisse said 16 billion Swiss francs ($17.24 billion) of its Additional Tier 1 debt will be written down to zero on the orders of the Swiss regulator as part of its rescue merger with UBS, angering bondholders.
FINMA, the Swiss regulator, said the decision would bolster the bank’s capital.
The central bank also helped by providing 100 billion Swiss francs ($108 billion) in liquidity assistance.
The move reflects authorities’ desire to see private investors share the pain from Credit Suisse’s troubles.
Chair Marlene Amstad said FINMA had stuck to the country’s “too-big-to-fail” banking framework in making the decision.
It means bondholders appear to be left with nothing while shareholders, who sit below bonds in the priority ladder for repayment in a bankruptcy process, will receive $3.23 billion under the UBS deal.
“It’s stunning and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders,” said Jerome Legras, head of research at Axiom Alternative Investments, an investor in Credit Suisse’s AT1 debt.
Reuters reported earlier on Sunday that Swiss authorities were considering imposing losses on bondholders as part of the rescue deal.
UBS’ CEO Ralph Hamers told analysts that the decision to write down the AT1 bonds to zero was taken by FINMA, so it would not create a liability for the bank.
How Did Credit Suisse Collapse?
Credit Suisse (NYSE:CS) has gone through financial difficulties many times since its inception but has been bailed throughout its history.
“A string of scandals over many years, top management changes, multi-billion dollar losses and an uninspiring strategy can be blamed for the mess that the 167-year-old Swiss lender now finds itself in”, says Reuters.
Chairman Axel Lehmann is blaming the banks collapse on retail investors.
In an interview in Switzerland, the Chairman says “last autumn we had a social media storm” and highlights the changing environment in the market.
“Last autumn we had a social media storm and this had huge repercussions, more in the retail sector than in the wholesale sector, and too much becomes too much.
And that’s when we reached this point, it’s an accumulation of various facts that contributed to one another then materialized at some point. And this then caused the situation.”
Axel Lehmann also said they were affected by a model that “no longer works in this market environment.”
Should There Be a Limit to How Many Times a Bank Can Get Bailed Out?
The fed said in 2021 that ‘meme stocks’ pose risks to financial stability, something retail investors voiced as the most absurd thing our body of government could conclude.
Overleveraged hedge funds, infinite capital from banks, and complicit regulators have been the main cause of systemic risk.
We’re beginning to see the retail crowd become a scapegoat for our financial system’s failures — though this isn’t going to last long.
The ‘it’s retail’s fault’ card won’t carry weight in lawful request for accountability.
This card was used during the ‘meme stock’ frenzy as well when Robinhood, Citadel, and other brokerages halted trading.
Retail investors were blamed but the truth is there was a massive liquidity problem and short sellers could not afford to close their naked shorts.
The only solution was to halt trading, take short positions again, and wait for prices to fall in order to make up losses.
Regulators waived billions in collateral, bailing institutions out of a massive mess.
More and more investors are losing trust in the financial system.
Now that Credit Suisse has escaped with $17 billion in write-off, it’s now more evident that certain institutions truly are too big to fail.
But I’d love to hear your thoughts on this – leave a comment down below.
Related: “The Game is Rigged” Says Ex-Citadel Data Scientist
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