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Famously, in that panicked Spring weekend in 2023 when it slipped into history<ref>We have a sense [[Credit Suisse]]’s history is not done just yet but that, like Disaster Area frontman Hotblack Desiato, it is merely spending a year dead for tax (and, er regulatory capital) purposes. It may well be back, at least as a high-street banking brand in Switzerland.</ref> the “trinity” of Swiss regulators put a gun to UBS’s head, forced it to make an honest bank of [[Credit Suisse]] in a process in which it absorbed [[Lucky]]’s equity, and the jewels and hellish instruments of madness and torture secreted around its balance sheet — ''other'' than its AT1s. The regulators instead, by ordinance, directed [[Credit Suisse|Lucky]] to write down its Perpetual Tier 1 Contingent Write-Down Capital Notes to zero. | Famously, in that panicked Spring weekend in 2023 when it slipped into history<ref>We have a sense [[Credit Suisse]]’s history is not done just yet but that, like Disaster Area frontman Hotblack Desiato, it is merely spending a year dead for tax (and, er regulatory capital) purposes. It may well be back, at least as a high-street banking brand in Switzerland.</ref> the “trinity” of Swiss regulators put a gun to UBS’s head, forced it to make an honest bank of [[Credit Suisse]] in a process in which it absorbed [[Lucky]]’s equity, and the jewels and hellish instruments of madness and torture secreted around its balance sheet — ''other'' than its AT1s. The regulators instead, by ordinance, directed [[Credit Suisse|Lucky]] to write down its Perpetual Tier 1 Contingent Write-Down Capital Notes to zero. | ||
This — and there isn’t really a delicate way to put this, readers so let’s just come out with it — ''pissed the AT1 | This — and there isn’t really a delicate way to put this, readers so let’s just come out with it — ''pissed the AT1 noteholders the hell off''. | ||
Their indignance was largely driven by foundational conceptions of what subordinated debt securities are meant to be — that is, senior to | Their indignance was largely driven by foundational conceptions of what [[Subordinated|subordinated debt securities]] are meant to be — that is, senior to shareholders — rather than even a cursory glance at the terms or, goddammit, even the ''title'' of their Notes. | ||
They were fortified in their dudgeon by other central bankers (BOE, ECB, the Fed) unhelpfully announcing, for the record, that that is not how ''they'' would expect to treat [[AT1]]<nowiki/>s (you can just imagine FINMA honchos going “yeah, thanks Pal,” when a central banker from ''Greece'' — yes, yes, ''that'' Greece — went on record as saying “well needless to say we’d never do anything like that. We Greeks are civilised, not like the Swiss!”<ref>This is a paraphrase, and an exaggeration for effect, I freely admit.</ref> | They were fortified in their dudgeon by other central bankers (BOE, ECB, the Fed) unhelpfully announcing, for the record, that that is not how ''they'' would expect to treat [[AT1]]<nowiki/>s (you can just imagine FINMA honchos going “yeah, thanks Pal,” when a central banker from ''Greece'' — yes, yes, ''that'' Greece — went on record as saying “well needless to say we’d never do anything like that. We Greeks are civilised, not like the Swiss!”<ref>This is a paraphrase, and an exaggeration for effect, I freely admit.</ref>) and now ambulance chasing [[Litigation lawyer|litigator]]<nowiki/>s are whipping up even more foment, indelicately trawling [[LinkedIn]] to raise a pitchfork mob of aggrieved investors to go and sue — well, it isn’t clear ''who'' they would sue, or for what, since this was done by legislation — and even the normally mild-mannered financial analyst commentariat has been periodically erupting into virtual fist-fights about what the AT1s do or do not say. | ||
Meanwhile, from the investors, lots of jilted lover energy: “How could I ever trust a central banker again?” sort of thing, and lots of “who knew Switzerland was a banana republic?” vibes, too. | |||
Now the JC ''likes'' Switzerland, so he is staying right out of that debate: There are plenty of thought pieces from those more learned and temperate than the JC about that. | |||
=== But still === | === But still === | ||
But the conceptual question this all throws up, in the abstract, is an interesting one: | But the conceptual question this all throws up, in the abstract, is an interesting one: should creditors, however subordinated, ever rank ''behind'' common shareholders? Surely not? | ||
Everyone knewAT1s could get converted into equity, at which point they rank equally ''with'' shareholders, and even written off — but there seemed to be the expectation that a write-off would only happen if common shareholders are getting written off too. | |||
First, a little spoiler: ''effectively'' ranking behind shareholders and ''actually'' ranking behind shareholders feel similar — especially if you have just been written down to zero while the shareholders live to see another day — but they are quite different things. | |||
A | Two spoilers, in fact: issuers ''must'' have contemplated writing AT1s down while shareholders survived: otherwise, why even ''have'' a write-down option? A write-down contingent on total shareholder annihilation is no different from a normal conversion to equity: you get what the shareholders get: zero. That kind of write-down option would be meaningless. | ||
The whole point of a write down to zero is to deliver a capital buffer and stave off an insolvency ''so the corporation can carry on''. If it succeeds, the shareholders will live to see another day. | |||
So the JC thinks those central banks who are on record as saying “we’d never write off AT1s before shareholders” are flat out ''wrong''. | |||
A corporation’s shareholders take all the profit and all the losses of the undertaking. You can only work out what those profit and losses are once every other claim on the enterprise has been settled. Those other claims have the feature of being ''debtor'' claims. Debtor claims all have defined payoffs; equity claims are, “whatever’s left”. | |||
So, when resolving a company that has gone bust, you must deal with AT1 creditors ''before'' you finally settle up with shareholders. You can do this two ways: you can convert the AT1s into shares or, if its terms permit, you can just write them off altogether. Either way, by the time you deal with shareholders, no AT1s are left. Only shareholders remain. | |||
Therefore, the AT1 investors do not ''actually'' rank behind shareholders. They ''can’t''. They either ''become'' shareholders, or they are ''goneski''. If they get converted into shares they ''may'' get some recovery, but only once all the company’s other creditors have been repaid in full. A written down AT1 ''has'' been paid in full. The liability was just zero. | |||
But AT1 investors whose notes are written off still feel as if they are ''effectively'' ranking behind shareholders. This is because they get nothing and shareholders get something. | |||
But is that really true? | |||
{{sa}} | {{sa}} | ||