A dozen years ago, I went to the London office of Credit Suisse for a tutorial about so-called “cocos” — or the contingent convertible bonds introduced after the 2008 financial crisis, in a bid to enable banks to absorb losses in a crisis. The CS financiers duly presented a neat PowerPoint, complete with arrows and charts, which explained that cocos lay second from bottom in the capital structure. Thus if a bank went bust, its equity would be wiped out first, followed by the cocos, in order to protect senior creditors. In exchange for this risk, those bonds paid a high (ish) return to investors, reflecting the normal rules of financial capitalism.
No longer. As the dust settles (or, more accurately, floats in mid-air) from the Credit Suisse drama, many astonishing details about this weekend’s acquisition of the bank by UBS are tumbling out. But the most striking detail to my mind is the Swiss National Bank’s decision to let CS equity holders keep $3bn of value, but wipe out the $17bn in AT1s (or “additional tier one” bonds), which are a variant of cocos.
This has sparked unusual criticism from European regulators. It may still spark legal action from bondholders, which include pension funds, insurance companies and other wealthy investors. “In my eyes, this is against the law,” Patrik Kauffmann, a fund manager at Aquila Asset Management, told the FT.