Credit Suisse/AT1: More tears for conflicted Swiss officials

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

Bond disputes usually involve a confrontation between investors and company bosses. It’s incredibly rare for a broadcaster to take sides with disgruntled creditors. Credit Suisse anyway disputed the reckless decision by the Swiss authorities to cancel its additional first-level qualifications.

Swiss officials wanted UBS to buy out its ailing rival. The waiver of the capital evaporation requirement first saved the buyer $17 billion. This imposed a heavier cost on Switzerland. It has tarnished the country’s reputation for financial reliability and burdened it with legal disputes that will reverberate for years.

Unusually, EU and UK financial authorities publicly criticized their Swiss counterparts. Credit Suisse objected first, privately. It did so because at least 5,000 executives had $400 million in bonus awards that reflected the AT1s’ performance. Payments have been cancelled. Together with a part of the AT1 holders, the managers are intention to sue the Swiss regulator Finma.

The so-called contingent capital awards were popular with some Credit Suisse executives as, ironically, they appeared to offer more security. A semi-annual dividend provided an 8% annual return. The trade-off had less potential for capital gains than more typical equity premiums.

This latest dispute is further evidence of the FINMA’s haste. The watchdog says a “feasibility event” was looming, endangering the nation’s banking system. A threat to one of the nation’s largest domestic banks could infect the entire system, he argues. This legal expropriation of AT1 capital was justified, according to the FINMA, for national needs.

But in other cases, such as forcing the sale of private land for public needs, compensation is usually paid. AT1 holders have not received any so far.

The chances of Credit Suisse bankers getting compensation from government coffers appear slim, at least from a political standpoint. A history of reckless risk-taking by a subset of these executives was the reason clients began withdrawing deposits amid a wider banking turmoil.

However, the case undermines Switzerland’s claims that its ability to overturn the hierarchies of capital was well known. The financial professionals employed by the issuer also thought AT1s were safer.

Regulators are meant to set rules and control them. Evidence is mounting that Finma – under heavy pressure from politicians – did just the opposite.