The demise of Credit Suisse – a case study for the ages
The speed with which Credit Suisse was forced into its shot-gun marriage with UBS over a weekend is certainly an incredibly interesting case study for economists, lawyers and political scientists to study for many years to come.
The first interesting dimension to note is that this was not a resolution or liquidation, but rather a government-supported merger and acquisition. Calling it a market-based solution, however, seems a bit stretched given the heavy involvement of Ministry of Finance, Swiss National Bank and financial regulator Finma.
The second striking dimension is the wipe-out of AT1 bonds, while shareholders retained some value for their shares during the merger. There is a principle of a pecking order, which puts these claimholders ahead of equity, which was overturned with this. On the other hand and as this wipeout was done with Credit Suisse as going rather than gone concerns, the legal rules seems to have been followed.
Why did the Swiss authorities choose this and not another solution? Why not wipe out shareholder claims and create a bridge bank? Why not looking for a new investor? There are many good answers to this (too high a burden on government’s finances; not enough time for such an alternative deal). But there are certainly also political reasons: who are the shareholders and who are the AT1 holders and where are they located? Banking nationalism might have prevented authorities to sell a Swiss institution. And allowing bankruptcy would have been too hurtful for Swiss pride (“ Credit Suisse is a part of Switzerland’s modern national identity story”).
Two additional links that might be of interest:
An interview I did with a Malaysian radio station discussing the recent banking turmoil
A seminar that we are organising tomorrow (31 March) at 2 pm