Recently, a group of Credit Suisse bondholders took legal action against the Swiss government, demanding full compensation for the controversial decision to write down the bank’s Additional Tier 1 (AT1) debt. This move was a result of Credit Suisse’s emergency sale to UBS, which was orchestrated by the Swiss government. The Swiss regulator Finma decreed that approximately $17 billion of the bank’s AT1s be written down to zero, while the bank’s shareholders received payouts as part of the sale. This decision incensed bondholders, as it disrupted the traditional hierarchy of restitution in bank failures under the Basel III framework.
Law firm Quinn Emanuel Urquhart & Sullivan, representing the plaintiffs, filed a lawsuit in the U.S. District Court for the Southern District of New York. The lawsuit contends that Switzerland’s action of reducing the plaintiffs’ AT1 value to zero was an unlawful violation of their property rights. The spokesperson for the Swiss Finance Ministry chose not to comment on the matter, while Finma defended its decision, stating that it was necessary due to a “viability event.”
The face value of the AT1 bonds held by the plaintiffs in the lawsuit exceeded $82 million, according to reports. AT1 bonds are classified as risky junior debt instruments used by banks. They were introduced post-2008 financial crisis to redistribute risk from taxpayers to financial institutions and bolster their capital reserves. One key feature of AT1 bonds is their ability to absorb losses by converting into equity when a pre-established capital threshold is breached.
Switzerland’s decision to write down Credit Suisse’s AT1 debt to zero has sparked a legal battle that could have far-reaching implications for the hierarchy of creditors in bank failures. The contention between bondholders and regulators raises questions about the sanctity of property rights and the responsibilities of financial institutions in times of crisis. The outcome of this lawsuit will have implications for future banking regulations and the treatment of bondholders in distressed institutions.
The legal dispute surrounding Credit Suisse’s AT1 debt write-down underscores the complexities of bank resolutions and the competing interests of various stakeholders. The outcome of this lawsuit will not only impact the involved parties but also set a precedent for the treatment of bondholders in similar circumstances. As the case unfolds in the U.S. District Court, the financial industry will be closely watching to see how the courts navigate the intricate web of regulations, property rights, and financial stability.
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