Swiss solve one problem at Credit Suisse, but create another for bondholders

theguardian.com:

H ere, first, is what the Swiss financial authorities got right. They recognised that outsiders’ confidence in Credit Suisse was shot. They saw that the flight of depositors, which was reported to have reached €10bn (£8.7bn) a day last week, would get worse. They knew that only a full takeover, as opposed to complicated financial surgery, could withstand another onslaught by markets.

That being so, the buyer had to be UBS, a credible institution whose management could be told to think of its patriotic duty and do the deal over a weekend. And the terms, at face value, look generous to UBS, so the risk of creating a bigger banking whirlpool is lessened. The danger is not eliminated but plenty of grown-up banking voices judged that the acquirer is getting a bargain (a better one, for example, than the non-bargain that was Lloyds TSB’s rescue of Halifax Bank of Scotland in 2008).

As an exercise in pragmatic resolution, then, it could have been worse. The pretence that the sale is wholly a private sector solution is risible because UBS was strong-armed into the deal (as the bank’s statement made clear, more or less) and has been given a loss guarantee of up to 9bn Swiss francs (£7.9bn) plus a 100bn franc liquidity line. But it’s not a desperate nationalisation, which would have terrified investors everywhere.

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Then, though, one comes to the confusing decision to wipe out holders of 16bn Swiss francs-worth of AT1, or alternative tier 1, bonds in their entirety while allowing Credit Suisse’s shareholders to escape with a payout of 3bn Swiss francs (£2.6bn) in the form of UBS