A group of Credit Suisse bondholders recently made headlines by filing a lawsuit against the Swiss government. They are seeking full compensation for the controversial decision to write down the failed bank’s Additional Tier 1 (AT1) debt. This move was part of Credit Suisse’s emergency sale to UBS, which was orchestrated by the Swiss government. The Swiss regulator Finma decided to wipe out approximately $17 billion of the bank’s AT1 bonds, reducing their value to zero. This decision deviated from the typical European hierarchy of restitution in the event of a bank failure under the Basel III framework.
The plaintiffs, represented by the law firm Quinn Emanuel Urquhart & Sullivan, have described Switzerland’s decision to write down their AT1 bonds as “an unlawful encroachment on the property rights of the AT1 bondholders.” They filed a lawsuit in the U.S. District Court for the Southern District of New York, emphasizing the injustice of wiping out $17 billion in AT1 instruments. Dennis Hranitzky, a partner at Quinn Emanuel, condemned Switzerland’s actions and defended the property rights of the bondholders.
AT1 bonds are a type of bank bonds that carry a higher level of risk compared to traditional debt instruments. They were introduced in the aftermath of the 2008 financial crisis to strengthen financial institutions’ capital buffers and shield taxpayers from future crises. One crucial feature of AT1 bonds is their ability to absorb losses when a bank’s capital ratio falls below a certain threshold. In such cases, the AT1 bonds are converted into equity, allowing bondholders to share the burden of financial losses.
The lawsuit filed by the Credit Suisse bondholders shines a light on the complexities of financial regulations and the rights of investors in times of crisis. The decision to write down the AT1 bonds to zero not only deprived bondholders of their investments but also challenged the established hierarchy of repayment in the event of a bank failure. As the legal battle unfolds, it raises important questions about the protection of investors’ rights and the responsibilities of regulators in safeguarding the stability of the financial system.
The lawsuit against the Swiss government over the treatment of Credit Suisse’s AT1 bonds highlights the challenges and controversies surrounding financial regulations and investor protection. The outcome of this legal battle could have far-reaching implications for the future of bank resolutions and the rights of bondholders in times of crisis.