Gonna

 

stick with financial news from earlier this week here for a bit.

Funny how Credit Suisse(s) collapse was Sunday evening, Monday it was all there was in the news and then Tuesday it was back down to a barely noticeable in the feed.

Yup...

Ought to tell you something about how your news is managed...

Says the student of media for 40+ years with a degree in mass Communications.

Yup...

Additional tier 1 bonds: the wiped-out debt at centre of Credit Suisse takeover

"The sale of Credit Suisse to UBS is the most dramatic moment in global banking since the financial crisis of 2007-08. It has also thrust into the spotlight the reforms that the global financial system has undergone in the past 15 years."

(Now you understand why it was so less noticeable a story Tuesday?)

"Since the last crisis, regulators have sought to transfer more of the risk of a systemic bank failure away from depositors and on to bondholders. This was seen as a way of strengthening bank balance sheets, and avoiding contagion between banks or the need for taxpayer-funded bailouts."

"On the face of it, the Credit Suisse episode fulfilled that ambition. About $17bn in Credit Suisse additional tier 1 (AT1) bonds were wiped out as part of the transfer to UBS, essentially reducing the burden on its new owner and hitting investors who knew they had bought risky instruments."

"But the controversy around the decision — particularly the fact that bondholders were treated more harshly than shareholders — has rippled across the wider $260bn AT1 market. It is the biggest test to date of a regulatory framework that has, until now, been mostly untested."

(We knew we were in uncharted waters when the financial crisis hit. And now here we are.)

"When bond investors lend money to companies, they typically have a claim on the company’s assets if it cannot pay back the money. But AT1 bonds, a type of debt issued by banks, are deliberately designed so that investors’ claims disappear at times of distress."

(Hey I tell ya what, I got some paper I'll give you and you give me your money for it, and when the shit hits the fan? I can just say forget it I don't owe you nothing. Of course its issued by a bank. If people bought this crap knowing this could happen? Oh well, sucks yup, gonna ripple through economy etc yup...It's only because they are wealthy they think it shouldn't have happened to them.

It was always going to someday, might as well be now.

BTW:

Revelation 9:20

And the rest of the men which were not killed by these plagues yet repented not of the works of their hands, that they should not worship devils, and idols of gold, and silver, and brass, and stone, and of wood: which neither can see, nor hear, nor walk:

(If you are putting your faith in worthless pieces of paper? You are making a big mistake and might as well be worshipping Devils. Anybody know what the paper we use to day is made of of? Just wondering. I live about 15 miles from a paper mill...We kinda know around here what its made out of.)

"Banks must maintain certain so-called capital ratios — a measure of financial health that compares an institution’s equity capital with its risk-weighted assets. AT1 bonds are a part of the bank’s overall debt that is wiped out when the capital ratio falls below a certain level, automatically strengthening it and benefiting creditors with higher-ranking claims, such as owners of senior debt.

But as well as an automatic trigger, the bonds can also be wiped out by the stroke of a regulator’s pen. This is the issue under discussion following the Credit Suisse sale."

(Give me your $, I'll give you some paper. What exactly is the difference between this and a casino then? Or the Mob? Or a loan shark?

2:02 mark

"and the banks feel like cathedrals because the casinos took their place"

and later:

"Chance is a kind of religion

Where you're damned for plain hard luck"

"Love, come on down

Let my numbers come around" )

"Investors in AT1s, which have no clear maturity but can be called by the issuer, are paid relatively high returns of 6 to 7 per cent to compensate them for the risk of a writedown. In Credit Suisse’s case, the returns were even higher: the bank issued an AT1 bond at a yield of 9.75 per cent last year."

"Other lenders to the bank, such as senior bondholders or depositors, receive much lower returns but are protected by the existence of AT1s and other bonds that are more exposed in the so-called creditor hierarchy, such as tier 2 debt (regulators require banks to issue various kinds of capital that are ranked by different tiers).'

"However, shareholders were not wiped out as part of the Credit Suisse sale to UBS. This, in the words of some investors, appeared to be an “obvious breach of the hierarchy of claims” — a widespread sense that AT1 would be in the line of fire after equity.'

(Yo? Guys and gals? 

Ya gave ya money to the biggest gangster's ever. What did you think was gonna happen?

Opps.)

Has this happened before?

(Keep in mind we are talking about Europe now...)

"Alongside requirements to issue loss-absorbing debt, regulators have also increased the power of so-called resolution authorities to make critical decisions regarding the fate of an institution at times of distress."

(Who are they then?

"so-called resolution authorities"

The regulators cousins?

Step uncle?

You kidding me you dont think people have got this figured out by now?)

There are so far very few precedents. The most significant is the failure of Spain’s Banco Popular in 2017. In that case, the equity was wiped out as well as the AT1 bonds. It is worth noting that in that instance, bondholders also complained of foul play and pursued unsuccessful legal action against the regulator.

(Of course it was an unsuccessful legal action.

Who got the $ in these situations again?

Huh?

Why do you really think regulators:

"increased the power of so-called resolution authorities" 

and that

Legal action pursued against them was unsuccessful?

System rigged yo.

Even against the wealthy.

You really gonna stand up to this by yourself?

Have fun.

Good luck.

You already know where the answer lies:

)

"In this case, it is unclear whether aggrieved bondholders might have more success. The bonds’ documentation states that Finma, the Swiss authority, “may not be required to follow any order of priority, which means, among other things, that the notes could be cancelled in whole or in part prior to the cancellation of any or all of CSG’s equity capital”

(Just give it to me then lol

The paper ill give you back wont be any more worthless)

What are the wider implications?

The principle reflected in AT1 bonds — that bond investors should bear the risk of failure — is also applied in another part of the bank bond market. Globally systemically important banks have also needed to meet requirements to increase their total loss-absorbing capacity (TLAC). In simple terms, this means that more of their liabilities will be designed to take losses in a crisis."

(Comin soon to a neighborhood near you basically)

"While the AT1 market is about $260bn in total, the world’s biggest banks were issuing $350bn to $400bn of TLAC debt annually in the three years to 2019, according to the Financial Stability Board, a global regulatory body. This market is therefore much larger, and a much more significant backstop 

(Thats the good news.)

if the health of the banking system were to deteriorate more than it already has in recent weeks.

(The inevitability of that is the bad.)

"The bonds (AT1), which can, like equity, trade in ways not always clearly related to underlying fundamentals, have the capacity to become a crude proxy for the health of a bank. While they stand to protect against the risk of a depositor run, 

they may fuel the risk of other kinds of panic within financial markets themselves."

(And that is where we are rn.)