Some 3,000 investors want to recover billions lost during the Credit Suisse rescue. This could cost the Confederation and UBS dearly.
Florence Vuichard / ch media
The former directors of Credit Suisse fought to the end and against almost everything: against the conditions imposed by the supervisory authority, against the injection of liquidity to keep them alive, against rescue aid, against realistic assessments of the state of their bank – and especially against the forced sale to UBS.
On the day of the definitive end of the big bank, the executives tried everything, drawing the card of the Blackrock wealth manager. A maneuver that the Federal Council instantly described as a “pseudo-solution” which would have “wasted a few hours for the authorities”, indicates the report of the parliamentary commission of inquiry (CEP).
Faced with this excessive stubbornness, it is no wonder that managers have lost all credibility. Even when they warned against the downgrading of AT1 loans. These were written off: at 10:01 p.m., shortly after the historic press conference on March 19, 2023, when the Financial Market Supervisory Authority (Finma) presented its decision. The holders of these loans thus lost 16 billion francs in nominal value, while Credit Suisse’s debt burden was reduced accordingly.
AT1 loans are loss-absorbing securities which, in the event that a systemic bank requires state assistance, can either be converted from third-party funds into equity, or – as in the present case – be fully amortized. Justice must now say whether it was justified or whether, for once, those responsible for CS would have been within their rights.
Around 320 complaints filed
And this will be the case, as the St. Gallen court clarifies to us:
“Approximately 320 appeals have been filed with the Federal Administrative Court in relation to AT1 capital instruments”
The appeals bring together nearly 3,000 plaintiffs. In total, these creditors – individuals and institutional investors such as pension funds – would have lost seven to eight billion francs compared to the nominal value of the loans, according to estimates by trial observers.
In French-speaking Switzerland, lawyer Jean-Pierre Jacquemoud of Jacquemoud Stanislas, where the former national advisor of the Center Guillaume Barazzone also works, has brought together creditors. Thomas Werlen, of the international firm Quinn Emanuel, heads the largest of these groups. The study represents nearly 1,000 creditors with claims of around 5.5 to 6 billion.
It is in the CEP report that the lawyers are now looking for clues to support their argument – namely that it is not because the conditions of the AT1 contracts were not met that the amortization was ordered, but because it was part of the deal between the authorities and UBS. The lawyers created a working group for this purpose and its members communicate regularly.
A guarantee of 25 billion francs
On page 424 of the report, we read that the CEP considers it credible “that UBS would only have accepted the merger with CS without amortizing the AT1 loans if the Confederation had granted much higher guarantees”. In other words, Bern could have granted UBS a loss guarantee of 25 billion francs – instead of an amount of “only” 9 billion combined with the amortization of AT1 to the tune of 16 billion. But the federal authorities would have “categorically refused an amount of several tens of billions (…)”.
In this logic, AT1 amortization ultimately appears as a means for the Confederation to minimize its own financial risk. The CEP therefore qualifies “the preparation of the AT1 depreciation order” as “adequate”. Without specifying whether this is in accordance with the law.
On Saturday March 18, 2023, the date of the debacle, the issue was described to the Finma board of directors as:
-“A necessary, non-negotiable part and a sort of cornerstone of the deal for UBS”
In any case, this is what is recorded in the minutes of the market policeman, taken up by the CEP. It is also specified that the sale requires liquidity via the Public Liquidity Backstop (PLB), which corresponds to State support and led to the depreciation of the famous AT1.
The Confederation has, however, not given too much thought to the issue, the report also reveals. The Federal Office of Justice (FOJ), usually consulted in such situations, was only involved in the last days of the crisis. On Saturday March 18, the OFJ “was also informed of the amortization of AT1 loans,” we read in the CEP document. Which also contains this revealing passage:
“The FOJ’s involvement in this matter has been superficial. In particular, the precise amortization conditions provided for in the emission conditions were not known.”
Play it safe
The Confederation finally played the security card and subsequently adapted the emergency ordinance of March 16, 2023: article 5a was added on March 19. It indicates that Finma can order CS to amortize additional basic capital in the event of granting the PLB, that is to say a liquidity injection with state guarantee. Berne thus wanted to “give Finma another, clearer, legal basis for ordering the depreciation”, justifies the report.
But doubts would have crossed the supervisory authority itself. It appears from the work of the CEP that the internal manager of the file, Alain Girard, explained to the board of directors of Finma on October 24, 2022 that use of the PLB “could lead to the cancellation of AT1 loans” . A conditional that leaves many questions unanswered.
The Financial Crises Committee, which included, in addition to the former boss of Finma Urban Angehrn, the former vice-president of the National Bank Martin Schlegel as well as two senior officials from the Finance Department, the treasurer Sabine D’Amelio- Favez and Secretary of State Daniela Stoffel, also examined this point several times in October 2022. The committee notably asked “from what date and under what circumstances the AT1 loans could be amortized. The question of whether the PLB would constitute a “Viability Event”, that is to say an event calling into question the bank’s ability to survive and consequently leading to its depreciation, also arose.
For the plaintiffs and their lawyers, it is clear that the AT1 loans in question could only have been amortized in the event of a lack of equity, and not in the event of a lack of liquidity – and therefore also not in the event of a PLB . Because the Confederation then certainly assumes the guarantee of default, but it remains an instrument of liquidity. Furthermore, the nine billion state loss guarantee did not benefit Credit Suisse, issuer of the loans, but rather UBS.
This is why the plaintiffs are now demanding that the Federal Administrative Court invalidate the Finma order. If they are rejected because the court considers the amortization proportional to the dramatic situation at the time and the threat of a financial crisis, some of them nevertheless request compensation for expropriation. In the event of victory on this point, the amortization of the loans will have to be canceled. In other words, UBS should rehabilitate these bonds. The big bank should not accept such a verdict without reacting – and once again call on the Confederation to take its responsibilities.
Credit Suisse is now a thing of the past, but on a legal level, it will still cause a lot of ink to flow.
Translated from German by Valentine Zenker
