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Both Levine here, and the Economist article we are all responding to, fail to look in extra detail at what happened in the Spanish situation with preferential s

Both Levine here, and the Economist article we are all responding to, fail to look in extra detail at what happened in the Spanish situation with preferential shares/AT1s . Around 700K investors, mostly elderly looking for a safe investment in their retirement, were told that they were a very sure thing by the very same issuing banks that were advising them on what to buy. It was a great deal for the banks, which were not in the safest spot at the time, and knew that every sale was just lowering the institution's risk. When the banks really got in trouble, the retail AT1 investors were zeroed out, losing billions. But the story didn't end there. Cases went to trial, as investors claimed that they were deceived into buying instruments they didn't understand, by institutions that had a lot to gain by pushing them. Money was recovered in many cases, albeit many years later. I don't know the story of who bought CS' AT1s, but it'd not be surprising if we had a bonus chapter or two, just like in the Spanish equivalent, where regulators and judges have to choose between bankers and a non-trivial number of voters that considers themselves scammed, and can change their vote accordingly. Either way, It's not hard to see that this kind of instrument is not something that an unsophisticated retail investor should be buying, ever.

JumpCrisscross 4y ago
> were told that they were a very sure thing by the very same issuing banks that were advising them on what to buy Separate problems. One, a security issued by an issuer. The second, bad sale by a broker. That the broker is affiliated with the issuer is interesting, and I imagine everyone who bought CS AT1s is gearing up the lawsuit bazooka, but not super relevant to the zeroing out per se.
lordnacho 4y ago
I think a big problem is calling the thing a bond. Everybody is going to think it is senior to equity when in fact it's junior, because that's what every class in capital structure says: the most junior tranche is called equity. In general complicating things is not a great idea. Why didn't the regulators just say "hey you guys just need to issue more regular equity" instead of inventing this weird Frankenstein? Especially in a crisis, people need to be able to think quickly and clearly about what they have, and making things more complex does not help that.
- blitzar 4y ago
  > Why didn't the regulators just say "hey you guys just need to issue more regular equity" Issuing equity in a crisis is very expensive, your share price is at a low point, your diluting the existing shareholders who have already lost a bunch of cash. Easier to issue paper that is pretending to be equity, claiming to be senior while actually being junior to not just actual losses of capital, but to regulatory whims.
  - lordnacho 4y ago
    Yes but they could have forced an equity raise before the crisis? As in "a bank with our national reputation riding on it needs x amount of equity"
    - blitzar 4y ago
      Ahh but that would trigger a downgrade by analysts as the return on equity for the bank would reduce - at the top price companies do buybacks of the shares they issued at low prices ... I dont want to come over as a socialist, but if your country has a bank with your national reputation riding on it, it should probably be part nationalised anyway - maybe someone could design a hybrid bond/equity/warrant/option for the state to hold with their half. If a corporation is borrowing your name and reputation you deserve to get paid for it (in non trickle down hiring and taxes $$'s).
flakeoil 4y ago
> Either way, It's not hard to see that this kind of instrument is not something that an unsophisticated retail investor should be buying, ever. It's something that no-one should buy and something that should not exist at all. All these complex products are made by the banks to make quick money and bonuses. It should not be allowed plain and simple. As we can see now, banks, investors and regulators cannot even figure out how these products work.

JumpCrisscross 4y ago

> were told that they were a very sure thing by the very same issuing banks that were advising them on what to buy Separate problems. One, a security issued by an issuer. The second, bad sale by a broker. That the broker is affiliated with the issuer is interesting, and I imagine everyone who bought CS AT1s is gearing up the lawsuit bazooka, but not super relevant to the zeroing out per se.

lordnacho 4y ago

I think a big problem is calling the thing a bond. Everybody is going to think it is senior to equity when in fact it's junior, because that's what every class in capital structure says: the most junior tranche is called equity. In general complicating things is not a great idea. Why didn't the regulators just say "hey you guys just need to issue more regular equity" instead of inventing this weird Frankenstein? Especially in a crisis, people need to be able to think quickly and clearly about what they have, and making things more complex does not help that.

blitzar 4y ago
> Why didn't the regulators just say "hey you guys just need to issue more regular equity" Issuing equity in a crisis is very expensive, your share price is at a low point, your diluting the existing shareholders who have already lost a bunch of cash. Easier to issue paper that is pretending to be equity, claiming to be senior while actually being junior to not just actual losses of capital, but to regulatory whims.
- lordnacho 4y ago
  Yes but they could have forced an equity raise before the crisis? As in "a bank with our national reputation riding on it needs x amount of equity"
  - blitzar 4y ago
    Ahh but that would trigger a downgrade by analysts as the return on equity for the bank would reduce - at the top price companies do buybacks of the shares they issued at low prices ... I dont want to come over as a socialist, but if your country has a bank with your national reputation riding on it, it should probably be part nationalised anyway - maybe someone could design a hybrid bond/equity/warrant/option for the state to hold with their half. If a corporation is borrowing your name and reputation you deserve to get paid for it (in non trickle down hiring and taxes $$'s).

flakeoil 4y ago

> Either way, It's not hard to see that this kind of instrument is not something that an unsophisticated retail investor should be buying, ever. It's something that no-one should buy and something that should not exist at all. All these complex products are made by the banks to make quick money and bonuses. It should not be allowed plain and simple. As we can see now, banks, investors and regulators cannot even figure out how these products work.