Credit Suisse was sold, Bondholders lost $17 billion, and the risk is still there

$UBS Group AG(UBS)$ will buy $Credit Suisse Group AG(CS)$ for $3.25 billion, essentially a 50% discount to last Friday's closing price. $Credit Suisse Group AG(CS)$ initially refused. After all, $Credit Suisse Group AG(CS)$ is a 167-year-old global systemically important bank with assets of more than US$1 trillion.

However, Swiss authorities, eager to broker the deal ahead of the Asian market, told $Credit Suisse Group AG(CS)$ they would consider nationalizing the bank if it did not accept the $UBS Group AG(UBS)$ bid. Pampered Swiss bankers certainly don't want to become state servants.

In order to facilitate this transaction, the Swiss National Bank needs to provide $UBS Group AG(UBS)$ with approximately US$100 billion in liquidity, and the Swiss government also guaranteed a loss of 900 million Swiss francs for $UBS Group AG(UBS)$ . At the same time, $Credit Suisse Group AG(CS)$ 's 16 billion Swiss francs (US$17.2 billion)of additional tier-one bonds AT1 were all written down and became worthless. The Fed also teamed up with five other central banks to provide dollar swaps to increase system liquidity.

The decline of $Credit Suisse Group AG(CS)$ is a story of serious internal risks out of control: from a private employee of Credit Suisse who tampered with customer signatures to conduct transactions, but $Credit Suisse Group AG(CS)$ ignored it because it saw the benefits on paper; to the two president candidates After people fought at the dinner party by the lake, $Credit Suisse Group AG(CS)$ was found to be monitoring several of its employees; in 2021, King Bill's Archegos broke its position, and $Credit Suisse Group AG(CS)$ found that it had unknowingly lent nearly 5 billion US dollars; finally, The Saudi funder father refused to further increase capital on the grounds of compliance. The stock price fell from the peak of 80 US dollars to a dollar last night, and the dignified Credit Suisse fell into a Swiss loan.

The most notable aspect of $Credit Suisse Group AG(CS)$ 's complex deal is the handling of Swiss authorities' CHF16 billion AT1 bonds. Simply put, the high-interest bonds issued by these bond banks are designed to supplement the bank's Tier 1 capital, and they are also the highest-interest bonds issued by banks that investors can buy. When the bank's capital is insufficient, such as the risk of a run, the supervision can trigger the terms of the full write-down of AT1 bonds according to the judgment (like the current situation of Credit Suisse). In the first quarter of last year, the capital adequacy ratio of the Swiss banking system was about 8% away from the trigger point of AT1 bonds on average. $Credit Suisse Group AG(CS)$‘s Tier 1 capital adequacy ratio before the accident exceeded 14%, while the regulatory requirement was around 7%.

Inexplicably, UBS's $3.2 billion takeover payment will go to$Credit Suisse Group AG(CS)$ shareholders, not AT1 bondholders first. After all, these bonds have priority over stocks in the capital structure. Of course, some people will say that there is only a little scum left, and it doesn't matter. However, the rules of the market must be abided by, otherwise the market will be out of the question and chaos will arise. Bond traders were called back to their desks over the weekend, with Credit Suisse's AT1 bonds trading at discounts of 20% to 70%. Zero now.

U.S. stock futures and the Nikkei began to rebound with relief after the Asian open, the dollar weakened, and gold and bitcoin strengthened. The market now tentatively sees Credit Suisse's AT1 bond writedown as a single event that will not spread to other banks. But it is conceivable that the AT1 bond prices of other banks will likely fall, which may endanger the capital adequacy of other banks. Trading data shows that financial conditions in the U.S. market have not tightened, and the implied volatility of the U.S. bond market has diverged from the implied volatility of U.S. stocks. Bonds are actually more dangerous than stocks (as shown in the figure).

On March 5, 1933, in an effort to curb a month-long bank run, President Roosevelt declared a four-day bank holiday, which was extended to the weekend on March 9 and held "fireside chats" on national radio, Tell the people of America that they are "safer in the bank than under the mattress." On March 12, Americans began lining up to deposit money back into the banking system, ending the longest bank run in U.S. history.

That is to say, guaranteeing only certain banks in trouble in a system cannot eliminate people's concerns. The pressure will be like a flood breaking a bank, breaking through from the weakest link until the whale waves are raging and no one can turn the tide. The U.S. Congress is still debating whether to publicly announce the guarantee of all deposits. Warren proposed raising the $250,000 limit on deposit guarantees. Congress asks: So how much is appropriate? half a million? one million? Or two million?

Just now, Credit Suisse's bondholders lost $17 billion.