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Credit Suisse investors question the legalities of enforced takeover

21 March 2023

Christopher Barrow, CEO of Metropolitan Safe Deposits, highlights the extraordinary controversy surrounding Switzerland’s state intervention in the acquisition of Credit Suisse.

Today’s edition of the Financial Times provides fascinating and insightful articles on how the Swiss government orchestrated the “shotgun” marriage of Credit Suisse and UBS over the weekend. In the words of some bankers and fund managers, the deal put together by the Swiss National Bank, regulator Finma and the minister of finance was “against the law” and smacked of “protectionism, geopolitical self-interest and state intervention”.

The Credit Suisse chairman was quoted as saying that three of the bank’s biggest shareholders (Saudi National Bank, Qatar Investment Authority and Saudi Arabia’s Olayan Group) had expressed their “extreme discomfort” with the opacity of the deal. According to the FT, a source close to one of the Middle Eastern shareholders was so incensed that he said “You make fun of dictatorships and then you can change the law over the weekend. What’s the difference between Saudi Arabia and Switzerland now? It’s really bad”.

Arguably, the most controversial element of the enforced deal is the total wipe-out of all the Credit Suisse AT1 bonds (additional tier one bonds) previously worth $17 billion; whereas the Credit Suisse equity holders are to receive UBS shares worth $3.2 billion, albeit at a huge discount to its closing price. Whilst AT1 bonds rank lower in the order of claims than ordinary bonds, common equity is usually considered subordinate to AT1 bonds in the capital structure. As one fund manager suggested, even if the Swiss government can override any legal challenges, concerns will remain concerning its apparent disregard for the normal rules of how assets are paid out in the event of a collapse.

For any business, effective rules and law enforcement foster and maintain the integrity of markets. Laws and regulations are essential in underpinning commercial activity. Companies and regulators must be judged by clear rules applied in accordance with the law. This is particularly crucial for foreign investors. The rules should be clear, investors must be treated fairly and the judiciary should be independent from government control.

Without trust in the law and (in this case) capital market rules, Switzerland is vulnerable to suffering significant reputational damage. The Swiss government’s controversial rescue of Credit Suisse may have averted a systemically contagious banking crisis in the short term, but the deal raises many questions about state intervention, trust in market rules and shareholder/bondholder rights.

Switzerland (like London, New York and Singapore) is a global financial centre. In our safe custody industry, Switzerland is an important centre for the storage of “high-end” items of value, such as art and precious metals. Global vaulting facilities are located only in the safest countries with a strong economy, a stable political system and an independent judiciary that protects individual and property rights. Following last weekend’s debacle, the Swiss authorities must be aware that Credit Suisse’s collapse and rescue have damaged the country’s reputation for stability and fairness.