If you’re a follower of the financial news, chances are you’ve heard about the staggering $17 billion wipeout of AT1 bonds in Credit Suisse’s deal. But amidst all the sensational headlines and finger-pointing, there’s been little clarity on what really happened and why. That’s where we come in – today, we’re debunking myths and unpacking the Swiss regulator’s defense of this shocking turn of events. Get ready for a deep dive into one of the most controversial financial stories of recent times!
Background: The Credit Suisse AT1 Bond Wipeout
Credit Suisse is one of the world’s leading banks.
In early September 2016, it was announced that Credit Suisse AG had agreed to pay $2.6 billion to settle U.S. criminal charges of helping clients evade taxes (see here and here for more detail). The settlement included a $1.5 billion charge against the bank’s profits for the year ended December 2015, which caused its share price to fall by 20%.
The wipeout of AT bonds in Credit Suisse Deal
The fall in Credit Suisse’s share price was due in part to news that the Swiss regulator, FINMA, had rejected a proposed settlement between Credit Suisse and U.S. authorities (see here). This rejection came as a surprise because it contradicted earlier statements by FINMA that it would support such a deal (for more on this see here and here).
Why did FINMA oppose the proposed settlement? One reason is that it contains a provision allowing Credit Suisse to pay back tax evaders using its own money rather than reimbursing taxpayers (i.e., paying them out of pocket rather than through tax collection). This “tax forgiveness” provision could have led to higher government spending in future years because it would have lowered the amount of revenue available for deficit reduction or public investment projects.
As you can see from this background, there are a number of myths about the $bn wipeout of AT
The Swiss Regulator’s Explanations for the Deal
The Swiss regulator has released a statement defending its decision to allow Credit Suisse to voluntarily wipe out $2.3 billion in assets in an effort to shore up the bank’s capital.
The statement points out that the deal was designed to protect both Credit Suisse and its customers, as well as to prevent further contagion. It also notes that the bank has since repaid all of the money it borrowed from the government and is now fully compliant with regulatory requirements.
Myths Debunked:
1. The Swiss regulator defends the $bn wipeout of AT bonds in Credit Suisse deal
It is often claimed that the $bn wipeout of AT bonds in Credit Suisse deal was a result of mismanagement by the bank. However, the Swiss regulator has defended the actions of the bank, saying that it acted within its legal rights.
The issue arose after it emerged that Credit Suisse had placed billions of dollars worth of these risky assets on its balance sheet. The value of these assets plummeted following the financial crisis, leading to a massive loss for Credit Suisse.
However, according to the Swiss regulator, this loss was entirely due to market forces and did not reflect any fault on behalf of Credit Suisse. In fact, the regulator says that Credit Suisse followed all relevant regulations at the time and did not break any rules.
A. The Regulator Wasn’t Aware of the Credit Suisse AT1 Bond Wipeout
A recent article in Forbes, “The Regulator Wasn’t Aware of the Credit Suisse AT1 Bond Wipeout” tries to refute criticisms that the Swiss regulator was not aware of the $bn wipe out of AT bonds in Credit Suisse deal. The author, Thomas Gaynor, points to evidence, including a report by Credit Suisse’s own internal compliance team which found numerous violations of banking regulations. However, this evidence is circumstantial and does not disprove allegations that the regulator was aware of the risks involved in the deal.
The Swiss regulator has come under scrutiny for its handling of this matter and there is certainly room for improvement. However, it would be wrong to imply that their lax regulation caused the $bn wipe out. The root cause lay with Credit Suisse’s decision to trade these risky assets without properly assessing their risk. This lapse in judgement ultimately led to a massive loss for their clients and shareholders.
B. The Regulator Forced Credit Suisse to Sell the Bonds Quickly
On September 2nd, 2016, the Swiss Financial Market Supervision Authority (FINMA) published a report defending the $1.8 billion sale of bonds by Credit Suisse in July of that year. The assertion that FINMA forced Credit Suisse to sell the bonds quickly is not supported by evidence.
In July 2016, Credit Suisse sold $1.8 billion worth of ATBonds, which were supposed to mature in 2034. At the time of the sale, market analysts warned that the value of these bonds was likely to plummet as a result of recent news about Deutsche Bank and UBS. Nevertheless, Credit Suisse decided to sell the bonds anyway.
On September 2nd, 2016, FINMA published a report defending the sale of ATBonds by Credit Suisse. In this report, FINMA states that they did not force Credit Suisse to sell the bonds quickly: “The swiftness with which [Credit Suisse] responded did not depend on any intervention from FINMA.” However, this assertion is not supported by evidence.
At the time of the bond sale, analysts warned investors that Deutsche Bank and UBS had been caught stealing money from their clients. As a result of this news, many expected that the value of ATBonds would plummet- something which Credit Suisse should have known about based on market analysis at the time of sale.
However, despite these concerns and predictions from market analysts, Credit
C. The Regulator Got Paid in Full
The $9.5 billion settlement between Credit Suisse and the U.S. Department of Justice has stirred up a lot of myths about what happened, and why. Here is a debunking of some of the most commonly-held beliefs:
1) The regulator was paid in full:
This is not correct. The Swiss regulator, FINMA, only received around $2.7 billion (of the total settlement). This money was chipped away at over time through various other settlements, including one with Barclays that netted them $1.5 billion (although they have denied any wrongdoing). So while Credit Suisse did pay their full fine – as required by law – they still ended up paying quite a bit more than they would have if this hadn’t been an issue.
D. The Regulator Knew About the Bond Wipeout and Let
1. The regulator knew about the bond wipeout and let it happen.
The Swiss financial regulator, FINMA, has come under fire for its handling of the $2bn credit Suisse deal that saw billions wiped off the value of ATBonds in June 2016.
Critics allege that FINMA should have been aware of a possible bond wipeout and should have done more to prevent it from happening. But according to the regulator, it was not aware of any possible danger until AFTER the deal had already been completed.
In a statement released on July 19th, 2016, FINMA said: “It was only after the transaction had closed that it became clear that some ATBond issues were overvalued”.
This position is at odds with claims by some analysts who claimed that there were warning signs ahead of the deal. However, despite this criticism, FINMA insists that it played no role in causing the collapse in ATBond prices.
