8 ms·

Credit Suisse’s takeover causes turmoil in a $275B bond market

145 points by cl42 4y ago

adamnemecek 4y ago
Couldn't have happened to a nicer group of people.
- d136o 4y ago
  I don’t know if wiping out bond holders is good… aren’t some of these rolled up into fixed income investments by people who are retired or close to retirement?
  - bhawks 4y ago
    Shh you'll ruin the moment. Yes there is a huge appetite for fixed income products, especially when the credit quality is initially strong or at the moment when the credit is so-so but the yield is just right. These end up in your pension, your mutual fund and so on even if you don't touch the product directly.
  - pkaye 4y ago
    Well atleast the CS workers still get their bonuses.
  - CydeWeys 4y ago
    Flat out they shouldn't have owned these if they wanted a safe investment. US Treasuries and similar would have been a better choice.
  - koolba 4y ago
    Granny really shouldn’t be buying esoteric bonds. And if her adviser is pitching them to her, then he’s at fault.
    - cmurf 4y ago
      But won't take responsibility, and no government will hold him accountable. Granny will be shit out of luck.
      - riffraff 4y ago
        > But won't take responsibility, and no government will hold him accountable In Europe we have regulations for this, and they are definitely held accountable, tho not very often. For example in the early '00s some Italian banks were held responsible for suggesting investment in argentine bonds as "safe" to unrefined clientele. At a minimum the Mifid questionnaire will restrict you from buying securities you do not understand, and any court will trivially be able to see if your financial advisor filled it in for you.
  - Analemma_ 4y ago
    I really resent the implication that we have to be hesitant about wiping out investors because some of them might be retirees. It feels like capitalism using them as human shields, especially since these fixed-income products were forced on us, replacing guaranteed-benefit pensions.
- deleted 4y ago
  [deleted]
metadat 4y ago
https://archive.today/HrC7O https://archive.today/HrC7O
jmyeet 4y ago
So UBS picks up CSFB for ~$3 billion and then immediately manages to write off $17B in debt. Word has it the book value was near zero when it was bought. So didn't UBS just pocket $17B+ for $3B? Sounds like a good deal if you can get it. Not for the AT1 bondhodlers of course.
- cm2187 4y ago
  Don't forget the 35bn of CET1 in CS. CS had stronger capital ratios than JPMorgan.
- Kenji 4y ago
  Yes. UBS made an _amazing_ deal right here. They bought out their biggest competitor in the country, blessed and assisted by the government, for pocket money. Someone's gonna celebrate on their private yacht after this masterstroke.
- deleted 4y ago
  [deleted]
- scott00 4y ago
  I think that people have been using the book value as of 31 Dec 2022. Probably lower now. The equity was trading around 9 billion on Friday, but traders could have been pricing in the assumption that the AT1s were getting written down even if it hadn't been officially decided.
- maxerickson 4y ago
  Is that the right way to describe it? I mean the deal triggering the write down. Another way to describe it is that the write down of the AT1 bonds makes the deal possible. From a consumer standpoint, the question is really how well the actual risk of the bonds was communicated, it sounds like the contract was executed as written.
  - jmyeet 4y ago
    I don't know the technicalities of the AT1 trigger events and conditions but it seems from the article what happened is not what AT1 holders expected to happen, which is that when the bank fell out of compliance, coco bonds turned into equity. In this case the CSFB AT1 bonds were written down to zero value and the equity holders got something. Again, I have no opinion on if this is legal or even right. Some simply didn't expect this outcome, rightly or wrongly.
taspeotis 4y ago
Matt Levine [1]: > This — a “7% trigger permanent write-down AT1” — is not the only way for an AT1 to work, though it is the way that Credit Suisse’s AT1s worked. Some AT1s have different triggers. Some AT1s convert into common stock when the trigger is hit, instead of being written down to zero; others are temporarily written down (they stop paying interest) when the trigger is hit, but can bounce back if the equity recovers. (Here is a 2013 primer on CoCos from the Bank for International Settlements.) > These securities are, basically, a trick. To investors, they seem like bonds: They pay interest, get paid back in five years, feel pretty safe. To regulators, they seem like equity: If the bank runs into trouble, it can raise capital by zeroing the AT1s. If investors think they are bonds and regulators think they are equity, somebody is wrong. The investors are wrong. > In particular, investors seem to think that AT1s are senior to equity, and that the common stock needs to go to zero before the AT1s suffer any losses. But this is not quite right. You can tell because the whole point of the AT1s is that they go to zero if the common equity tier 1 capital ratio falls below 7%. > ... > That's the trick! The trick of the AT1s — the reason that banks and regulators like them — is that they are equity, and they say they are equity, and they are totally clear and transparent about how they work, but investors assume that they are bonds. You go to investors and say “would you like to buy a bond that goes to zero before the common stock does” and the investors say “sure I’d love to buy a bond, that could never go to zero before the common stock does,” and the bank benefits from the misunderstanding. [1] https://www.bloomberg.com/opinion/articles/2023-03-20/ubs-got-credit-suisse-for-almost-nothing https://www.bloomberg.com/opinion/articles/2023-03-20/ubs-go...
- dang 4y ago
  Related: UBS got Credit Suisse for almost nothing - https://news.ycombinator.com/item?id=35236043 https://news.ycombinator.com/item?id=35236043 - March 2023 (117 comments)
- JumpCrisscross 4y ago
  TL; DR Swiss AT1 securities are unlike others. If the SNB said the right magic words first (CET1 < 7%), this is proper form.
  - 4y ago
varunjain99 4y ago
It seems like whenever a bank fails, there are custom rules as to what happens made up on the fly. In this case, surprisingly, bondholders were wiped out. Does this have long-term implications on how bankers will act? If so, what?
- s1artibartfast 4y ago
  I thought so too on my first reading, but it seems like those rules were printed on the bonds they bought, not made up on the Fly
  - jldugger 4y ago
    Bond territory is wild lands -- they all have their own legal terms, and are only kind of standard. Some dude gave a talk at Yale's Fincancial Markets course about how he would pour over bonds looking for ones with accelleration clauses, and then find reasons to demand accelleration, with a key example being the options backdating scandal[1] that hit many bay area execs including Steve Jobs. Also: apparently Russia quietly removed some key language about sovereignty into its bonds in 2018[2] _for some reason_. [1]: https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/ https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/ [2]: https://virginialawreview.org/articles/a-silver-lining-to-russias-sanctions-busting-clause/ https://virginialawreview.org/articles/a-silver-lining-to-ru...
    - s1artibartfast 4y ago
      Fascinating read regarding the Russian APC clause, thanks.
capybara_2020 4y ago
Just an observation. In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money in what was essentially a regional bank that experienced a sudden surge in deposits over the past two years. They put their money there because it offered better terms. When it went belly up they wanted to be made "whole" again. They put money in without understanding the risks. On the other hand, as the article says, lots of these bonds were bought by Asian banks for their wealthy clients who were looking for better returns and considered these bonds safe. Who in theory sound like a similar demographic as the VCs and founders. But the comments here go on about how the investors need to lose everything. The contrast in commentary is fascinating. Maybe these are all just indicators that the financial market has become way too complicated with risks hidden away and no one is really able to wrap their head around all the risks. This complexity might actually be a good thing for everyone. With the central banks bailing out banks/financial instruments It is a case of reap the rewards while the going is good and then once things go bad, just shout about how the risks were not understood and get your money back. As a side note, I am not personally invested in either of these cases.
- crazygringo 4y ago
  > In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money... Depositors are not investors. They don't have equity in the bank. You're supposed to do your research on a business when you invest in it. You're not supposed to have to do research into a bank's financials when you're just using it as a bank. You're supposed to be able to trust government regulators. It's the same way you're not supposed to have to research the construction of each bridge before you drive over it.
  - cjbgkagh 4y ago
    Depends if it’s a bail-in or a bankruptcy and depositors don’t get to pick which one is applied to their bank.
  - favflam 4y ago
photochemsyn 4y ago
The largest shareholders are the Saudis and Qataris, the shareholders appear to have gotten some sweetheart inverted deal relative to the bondholders, and almost nobody is discussing it? You now if these financial markets just evaporated, who would care really, except a few aristocrats? Are they really doing anything worthwhile like building factories, or is it just a pack of percentage-harvesting parasites?
- miguelazo 4y ago
  Seems the Saudis aren’t getting off so easy as you suggest: https://www.wsj.com/articles/credit-suisse-collapse-burns-saudi-investors-3f096a07?mod=mhp https://www.wsj.com/articles/credit-suisse-collapse-burns-sa...
- riffraff 4y ago
  > You now if these financial markets just evaporated, who would care really, except a few aristocrats? Where you not around 15 years ago? When banks fail it's never "a few aristocrats" who get screwed, it's everyone.
- bootsmann 4y ago
  You probably should avoid using the word parasites and banks in the same context. The historical connotation is more than a bit errrrr.
- ilammy 4y ago
  > You now if these financial markets just evaporated, who would care really, except a few aristocrats? Everybody, because retirement is tied to financial markets. We can’t possibly not pay out 401k’s, right? Isn’t that a neat trick to ensure that everybody cares about the health of financial markets?
  - zamnos 4y ago
    Embezzling from the pension fund is a popular move among dishonest accountants, and what can you do if the money's simply not there? In times of great upheaval, promises get broken and in a governmental collapse, there's no entity left to keep those promises. Hopefully we are not in such calamitous times, but we shall have to see.
throwaway742 4y ago
If this ends up being the second time I get laid off right before the entire financial system collapses then I give up.
- jbm 4y ago
  Hey, I was there. 9-11 disrupted my life pretty fierce, and then I wound up losing a job offer right after Lehman collapsed. It took an year or so after to get a "normal" consulting job (that was over a handshake only). Worse yet, I had moved abroad and coming back home was not going to happen. In retrospect (and this absolutely was not my feeling at the time), it was a blessing in disguise. That year was much more interesting than any other part of my life, and I met a lot of people who made my life better years down the line. I sincerely hope things go well for you.
  - throwaway742 4y ago
    Thanks.

145 points by cl42 4y ago

adamnemecek 4y ago

Couldn't have happened to a nicer group of people.

d136o 4y ago
I don’t know if wiping out bond holders is good… aren’t some of these rolled up into fixed income investments by people who are retired or close to retirement?
- bhawks 4y ago
  Shh you'll ruin the moment. Yes there is a huge appetite for fixed income products, especially when the credit quality is initially strong or at the moment when the credit is so-so but the yield is just right. These end up in your pension, your mutual fund and so on even if you don't touch the product directly.
- pkaye 4y ago
  Well atleast the CS workers still get their bonuses.
- CydeWeys 4y ago
  Flat out they shouldn't have owned these if they wanted a safe investment. US Treasuries and similar would have been a better choice.
- koolba 4y ago
  Granny really shouldn’t be buying esoteric bonds. And if her adviser is pitching them to her, then he’s at fault.
  - cmurf 4y ago
    But won't take responsibility, and no government will hold him accountable. Granny will be shit out of luck.
    - riffraff 4y ago
      > But won't take responsibility, and no government will hold him accountable In Europe we have regulations for this, and they are definitely held accountable, tho not very often. For example in the early '00s some Italian banks were held responsible for suggesting investment in argentine bonds as "safe" to unrefined clientele. At a minimum the Mifid questionnaire will restrict you from buying securities you do not understand, and any court will trivially be able to see if your financial advisor filled it in for you.
- Analemma_ 4y ago
  I really resent the implication that we have to be hesitant about wiping out investors because some of them might be retirees. It feels like capitalism using them as human shields, especially since these fixed-income products were forced on us, replacing guaranteed-benefit pensions.
deleted 4y ago
[deleted]

metadat 4y ago

https://archive.today/HrC7O https://archive.today/HrC7O

jmyeet 4y ago

So UBS picks up CSFB for ~$3 billion and then immediately manages to write off $17B in debt. Word has it the book value was near zero when it was bought. So didn't UBS just pocket $17B+ for $3B? Sounds like a good deal if you can get it. Not for the AT1 bondhodlers of course.

cm2187 4y ago
Don't forget the 35bn of CET1 in CS. CS had stronger capital ratios than JPMorgan.
Kenji 4y ago
Yes. UBS made an _amazing_ deal right here. They bought out their biggest competitor in the country, blessed and assisted by the government, for pocket money. Someone's gonna celebrate on their private yacht after this masterstroke.
deleted 4y ago
[deleted]
scott00 4y ago
I think that people have been using the book value as of 31 Dec 2022. Probably lower now. The equity was trading around 9 billion on Friday, but traders could have been pricing in the assumption that the AT1s were getting written down even if it hadn't been officially decided.
maxerickson 4y ago
Is that the right way to describe it? I mean the deal triggering the write down. Another way to describe it is that the write down of the AT1 bonds makes the deal possible. From a consumer standpoint, the question is really how well the actual risk of the bonds was communicated, it sounds like the contract was executed as written.
- jmyeet 4y ago
  I don't know the technicalities of the AT1 trigger events and conditions but it seems from the article what happened is not what AT1 holders expected to happen, which is that when the bank fell out of compliance, coco bonds turned into equity. In this case the CSFB AT1 bonds were written down to zero value and the equity holders got something. Again, I have no opinion on if this is legal or even right. Some simply didn't expect this outcome, rightly or wrongly.

taspeotis 4y ago

Matt Levine [1]: > This — a “7% trigger permanent write-down AT1” — is not the only way for an AT1 to work, though it is the way that Credit Suisse’s AT1s worked. Some AT1s have different triggers. Some AT1s convert into common stock when the trigger is hit, instead of being written down to zero; others are temporarily written down (they stop paying interest) when the trigger is hit, but can bounce back if the equity recovers. (Here is a 2013 primer on CoCos from the Bank for International Settlements.) > These securities are, basically, a trick. To investors, they seem like bonds: They pay interest, get paid back in five years, feel pretty safe. To regulators, they seem like equity: If the bank runs into trouble, it can raise capital by zeroing the AT1s. If investors think they are bonds and regulators think they are equity, somebody is wrong. The investors are wrong. > In particular, investors seem to think that AT1s are senior to equity, and that the common stock needs to go to zero before the AT1s suffer any losses. But this is not quite right. You can tell because the whole point of the AT1s is that they go to zero if the common equity tier 1 capital ratio falls below 7%. > ... > That's the trick! The trick of the AT1s — the reason that banks and regulators like them — is that they are equity, and they say they are equity, and they are totally clear and transparent about how they work, but investors assume that they are bonds. You go to investors and say “would you like to buy a bond that goes to zero before the common stock does” and the investors say “sure I’d love to buy a bond, that could never go to zero before the common stock does,” and the bank benefits from the misunderstanding. [1] https://www.bloomberg.com/opinion/articles/2023-03-20/ubs-got-credit-suisse-for-almost-nothing https://www.bloomberg.com/opinion/articles/2023-03-20/ubs-go...

dang 4y ago
Related: UBS got Credit Suisse for almost nothing - https://news.ycombinator.com/item?id=35236043 https://news.ycombinator.com/item?id=35236043 - March 2023 (117 comments)
JumpCrisscross 4y ago
TL; DR Swiss AT1 securities are unlike others. If the SNB said the right magic words first (CET1 < 7%), this is proper form.
- 4y ago

varunjain99 4y ago

It seems like whenever a bank fails, there are custom rules as to what happens made up on the fly. In this case, surprisingly, bondholders were wiped out. Does this have long-term implications on how bankers will act? If so, what?

s1artibartfast 4y ago
I thought so too on my first reading, but it seems like those rules were printed on the bonds they bought, not made up on the Fly
- jldugger 4y ago
  Bond territory is wild lands -- they all have their own legal terms, and are only kind of standard. Some dude gave a talk at Yale's Fincancial Markets course about how he would pour over bonds looking for ones with accelleration clauses, and then find reasons to demand accelleration, with a key example being the options backdating scandal[1] that hit many bay area execs including Steve Jobs. Also: apparently Russia quietly removed some key language about sovereignty into its bonds in 2018[2] _for some reason_. [1]: https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/ https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/ [2]: https://virginialawreview.org/articles/a-silver-lining-to-russias-sanctions-busting-clause/ https://virginialawreview.org/articles/a-silver-lining-to-ru...
  - s1artibartfast 4y ago
    Fascinating read regarding the Russian APC clause, thanks.

capybara_2020 4y ago

Just an observation. In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money in what was essentially a regional bank that experienced a sudden surge in deposits over the past two years. They put their money there because it offered better terms. When it went belly up they wanted to be made "whole" again. They put money in without understanding the risks. On the other hand, as the article says, lots of these bonds were bought by Asian banks for their wealthy clients who were looking for better returns and considered these bonds safe. Who in theory sound like a similar demographic as the VCs and founders. But the comments here go on about how the investors need to lose everything. The contrast in commentary is fascinating. Maybe these are all just indicators that the financial market has become way too complicated with risks hidden away and no one is really able to wrap their head around all the risks. This complexity might actually be a good thing for everyone. With the central banks bailing out banks/financial instruments It is a case of reap the rewards while the going is good and then once things go bad, just shout about how the risks were not understood and get your money back. As a side note, I am not personally invested in either of these cases.

crazygringo 4y ago
> In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money... Depositors are not investors. They don't have equity in the bank. You're supposed to do your research on a business when you invest in it. You're not supposed to have to do research into a bank's financials when you're just using it as a bank. You're supposed to be able to trust government regulators. It's the same way you're not supposed to have to research the construction of each bridge before you drive over it.
- cjbgkagh 4y ago
  Depends if it’s a bail-in or a bankruptcy and depositors don’t get to pick which one is applied to their bank.
- favflam 4y ago

photochemsyn 4y ago

The largest shareholders are the Saudis and Qataris, the shareholders appear to have gotten some sweetheart inverted deal relative to the bondholders, and almost nobody is discussing it? You now if these financial markets just evaporated, who would care really, except a few aristocrats? Are they really doing anything worthwhile like building factories, or is it just a pack of percentage-harvesting parasites?

miguelazo 4y ago
Seems the Saudis aren’t getting off so easy as you suggest: https://www.wsj.com/articles/credit-suisse-collapse-burns-saudi-investors-3f096a07?mod=mhp https://www.wsj.com/articles/credit-suisse-collapse-burns-sa...
riffraff 4y ago
> You now if these financial markets just evaporated, who would care really, except a few aristocrats? Where you not around 15 years ago? When banks fail it's never "a few aristocrats" who get screwed, it's everyone.
bootsmann 4y ago
You probably should avoid using the word parasites and banks in the same context. The historical connotation is more than a bit errrrr.
ilammy 4y ago
> You now if these financial markets just evaporated, who would care really, except a few aristocrats? Everybody, because retirement is tied to financial markets. We can’t possibly not pay out 401k’s, right? Isn’t that a neat trick to ensure that everybody cares about the health of financial markets?
- zamnos 4y ago
  Embezzling from the pension fund is a popular move among dishonest accountants, and what can you do if the money's simply not there? In times of great upheaval, promises get broken and in a governmental collapse, there's no entity left to keep those promises. Hopefully we are not in such calamitous times, but we shall have to see.

throwaway742 4y ago

If this ends up being the second time I get laid off right before the entire financial system collapses then I give up.

jbm 4y ago
Hey, I was there. 9-11 disrupted my life pretty fierce, and then I wound up losing a job offer right after Lehman collapsed. It took an year or so after to get a "normal" consulting job (that was over a handshake only). Worse yet, I had moved abroad and coming back home was not going to happen. In retrospect (and this absolutely was not my feeling at the time), it was a blessing in disguise. That year was much more interesting than any other part of my life, and I met a lot of people who made my life better years down the line. I sincerely hope things go well for you.
- throwaway742 4y ago
  Thanks.