I know that I’m late to the AT1 party, but better late than never. More importantly, the media frenzy that lived for two weeks by digesting this topic over&over finally moved on and is now focused on the American Debt Ceiling. The way the media and the internet now influences financial markets is worrisome, but I won’t dwell on that now.

What I wanted to say is that, after careful analysis over the past few weeks, I believe that our government was right to wipe out the AT1 bond holders. I have many arguments for why this is the case, but today I want to present you with a counterexample, where a government did not wipe out the bond holders.

I was reading Michael Lewis’s 2011 book “Boomerang” and there is this section where he describes the actions of the Irish Finance Minister to guarantee the bond holders of the three Irish banks that failed in 2008. Please see the text attached.

This decisions proved catastrophic in the end as the government was placed on a high speed rail towards default and ended up in the hands of the IMF who completely reorganised the country’s finances and by extension its political system. (https://en.wikipedia.org/wiki/Ireland_and_the_International_Monetary_Fund?wprov=sfti1)

My 20 cents: I love Switzerland and I think it is a great country because of its independence, autonomy and freedom. I just want to draw attention to the fact that those three virtues are not God given, but they must always be cherished, appreciated and protected. We must not grow complacent. We live in interesting times where the vast majority of people would like you — and they would even force you — to think like them (this might be because they are insecure of their own positions). But don’t be afraid to stand-up and defend unpopular opinions or the little guy, and ultimately to protect this country’s independence. It’s among the last countries on the European continent that can still genuinely claim that it’s laws are made on its own territory by its own people and not in some foreign bureaucratic building by a faceless bureaucrat looking at a dashboard.

4 comments

  1. Memory is always short in financial markets. That’s how we have a new once-in-a-lifetime financial crisis ever few years.

    I still don’t get how some people have gotten it into their heads that investors should be bailed out. Investments are supposed to carry the risk that it could fail, no?

    Sure, it sucks that the unchecked gambling of a few assholes can crash banks and fail usually considered safe investments, but maybe that should be an incentive to create rules that make it harder for those assholes to gamble like that, not try to get the banks that allowed that behaviour out of any consequences by bankrupting a country…

  2. I don’t think anyone is complaining about wiping-off the AT1s. Given that UBS was only willing to pay 3bn after removing 17bn of debt from the bank (and therefore increasing its equity by the same amount) it is clear that it was necessary.

    What bondholders complain about is two things: 1- that the shareholders of CS still got away with *something*. Even if that something still represents a massive loss. And 2- that the law had to change overnight during a week-end to make this happen. It is not clear that this would have been allowed under the previous rules.

    The best explanation on this issue went a bit unnoticed, it was a piece written by Jerôme Legras for the Financial Times on the 21 of March

    [https://www.ft.com/content/2e5ac49b-b055-4bd0-a9fd-8a41e19028b9](https://www.ft.com/content/2e5ac49b-b055-4bd0-a9fd-8a41e19028b9)

    I will do it no proper justice to publish only some excerpts, the article is well worth reading:

    ​

    >If you are a supervisor, about to wipe out Sfr16bn of securities based on a complex interpretation of a prospectus and likely to face hundreds of lawsuits, why would you kill your strongest argument and say that Credit Suisse is solvent?!The reason is probably very simple: because the prospectus is not your legal basis for wiping out the bonds. And this is where we go back to the initial question: how did the Swiss do this, was it legal, could it be expected and was it fair?On March 16, after the statement of support for Credit Suisse was issued and the new liquidity line was decided, the Swiss passed a new law about emergency liquidity funding for systemic banks. This included two key elements: Article 4.c requires that the bank is solvent . . .
    >
    >*Pour l’octroi d’une garantie du risque de défaillance, les conditions suivantes doivent être remplies:…c. la FINMA confirme la solvabilité de l’emprunteuse ou confirme l’existence d’un plan d’assainissement. Si l’emprunteuse fait partie d’un groupe financier, la confirmation de la FINMA concerne l’ensemble du groupe.*
    >
    >(Ah! Maybe the reason for that FINMA statement is clearer now!)
    >
    >And . . . Article 6 follows Article 5:
    >
    >*L’approbation du crédit d’engagement nécessaire se fonde sur l’art. 28 de la loi du 7 octobre 2005 sur les finances*
    >
    >This may sound trivial, but suddenly, on Sunday evening, a new Article 5.a. appeared:
    >
    >*Dans ce contexte, la FINMA peut ordonner, dès l’approbation du crédit d’engagement, l’amor- tissement de fonds propres de base supplémentaires. L’ordre en question peut s’adresser à l’emprunteuse et au groupe financier. Il incombe à la FINMA de définir les destinataires de cet ordre.* ***L’amortissement de fonds propres de base supplémentaires visé à l’art. 5a peut égale- ment être ordonné en vue d’un scénario de reprise ou de rachat sans lequel l’emprunteuse se serait immédiatement retrouvée en situation d’insolvabilité.***
    >
    >**In plain English, any such emergency liquidity can lead to a full write down of AT1 bonds. And this is where we finally find the legal basis of the write-down. Not the Swiss resolution regime, not the bond documentation, but a law that was passed immediately before, just to allow it.**
    >
    >A law is legal, usually, unless a constitutional court or an international court disagrees, but bond investors are generally not too keen on emergency laws designed to wipe them out.At the end of this long exploration into AT1 shenanigans, I would like to stress that the most important lesson here might not be about AT1s!
    >
    >For what appears to be the first time, a central bank facility has extremely harsh conditions attached. In our world of social media and digital banking, any measure that reduces the effectiveness of central bank liquidity is unlikely to set a global standard. Walter Bagehot must be turning in his grave.

    ​

    And in case you doubt it here are the links, to the Ordonnance sur les prêts d’aide supplé- mentaires sous forme de liquidités et l’octroi par la Confédération de garanties du risque de défaillance pour les prêts d’aide sous forme de liquidités de la Banque nationale suisse à des banques d’importance systémique,

    [https://www.newsd.admin.ch/newsd/message/attachments/76272.pdf](https://www.newsd.admin.ch/newsd/message/attachments/76272.pdf)

    duly dated on the 19th of March, which was a Sunday, not a common date for bureaucrats to work and publish changes to the law.

  3. The issue is that shareholder of Credit Suisse didn’t go down as well. Or more, shareholder should have lost the most because shareholder should get the biggest risk.

    The money that went to the shareholders should have went to the CS AT1 Bonds and then wiped them out.

  4. Bond was never challenged, shareholders getting money was.

    Also, I wouldn’t admire decision so much, CS went through numerous audits everytime passing them and yet we ended up in a mess like there was no control, making laws and decisions on Sunday. And for all of that, not a single person responsible, no one resigned, no one under investigation. After that it is obvious that our system is far from stellar as we were led to believe.

    Now let’s hope 200bn+ is enough to fill in that black hole.

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