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If counterparties bought Credit Suisse’s AT1s without reading the terms, and therefore failing to protect themselves against risk, they were idiots and deserve
by ethbr0 4y ago
If counterparties bought Credit Suisse’s AT1s without reading the terms, and therefore failing to protect themselves against risk, they were idiots and deserve what they get -- nothing.
For starters, if they misunderstand how something works that badly, how were they modeling it to calculate value and volatility?!
"Sophisticated" financial players should be laughed out of the building for essentially saying "I didn't research what I was buying, and I just assumed they were like this other common thing."
- matthewdgreen 4y agoIt can simultaneously be true that these investors were idiots, and also that there will be many fewer idiots available to purchase bonds in the future when you need them to.
- ethbr0 4y ago2008 showed us what happens when idiocy and fraud become commonplace and without consequence. Better a few lose their shirts, such that others maintain a healthy dose of fear to motivate due diligence.
- zpeti 4y agoDo you think the same about all the inner city minority people who got adjusted rate mortgages which all collapsed in 2008, some who couldn’t even read, and were conned by banks? Why didn’t they make sure they understood what they were getting into?
- piva00 4y agoThey weren't sophisticated financial investors, they were conned by big finance.
- ethbr0 4y agoEh, little of column A, little of column B on the "conned." They were offered a contract, took it, got something (a home they probably couldn't afford), and then lost their home when rates exploded. "Conned" seems a little strong for agreeing to a bad contract. On the other hand, to the original point, it seems fair to expect bond traders to be more financially sophisticated than home buyers.
- AJ007 4y agoThis is definitely just the tip of the iceberg given the proliferation of covenant lite loans.
- markus_zhang 4y agoIt's a bit different that the bond holders get wiped out BEFORE the stock holders. I could be wrong, but I don't think the term specifically speaks about this. It does say "They note that at1 bond buyers have waived any right to reimbursement in a “write-down event”.", but is it before or after stock holders are wiped out? It leaves a lot of interpretation possibilities IMHO.
- danielmarkbruce 4y agoI'm told there was a clause in there which specifically said regular priority ordering may not occur and the notes could be cancelled before the equity was wiped out. The comment above is basically right. These are esoteric/exotic securities. If one is buying an exotic security whose value is based on the outcome of a bank going down(itself a complex process)... they need to read the docs.
- markus_zhang 4y agoThanks, that makes sense then. It is xtremely risky...
- cjbgkagh 4y agoIt is bail-in regulatory / bank discretion. A ton of bail in regulations around the world have it yet few people know of it. People are finding out now. That’s the real risk, what if banks can no longer shunt their risk on to ignorant investors, that is a big part of their business model.
- danielmarkbruce 4y agoYup... If people are investing in the securities of banks and don't understand the (incredibly complex) regulatory environment those banks operate in... they are going to lose their shirt. That being said, I don't think most banks are deliberately trying to put risk on the naive. They mostly just assume the buyers of the securities understand the situation. Even people inside a bank don't have a crystal ball on where things are going. A sophisticated bank investor can often see the situation more clearly than someone in the bank.
- inconceivable 4y agothey certainly didn't prepare. credit suisse's credit default swaps (insurance on bonds) skyrocketed last week. i don't work in finance so i don't know if CDS specifically covers this AT1 tier of bonds but seems like people were caught off-guard and were willing to pay up in a big way in order to mitigate a total loss.
- jpalomaki 4y agoI think it is more likely that investors knew what they were buying and we were happy when they could take more risk (and get higher returns) than they otherwise could. This kind of details can get lost in large organization when things get reported to higher ups. Which of course might be also beneficial to those doing the investments. Your risk exposure seems low, but profits are good - might earn you a good bonus.