Banks are the life bloods of an economy and credit makes the economy run. On individual basis credit is both good and bad, too much and you are in trouble, but some helps make your lifestyle better for the moment. For companies, credit is very useful and is used on a normal basis in the operations of the company. Only if the company goes too much debt and it becomes too expensive, then credit is not so good. Banks because of their importance in the community and state and national level become very important for the government. Depending on the size of the bank, for the largest 6 banks in the US they are semi declared as too big too fail. The same principle applies across the world.
In Switzerland the largest 2 banks are UBS and Credit Suisse, of the two, UBS is better run. Credit Suisse as a tendency for the past number of years to be the banker of choice of companies losing billions of dollars. When there is a crisis, the international banking community thinks how is Credit Suisse involved?. Credit Suisse has some very profitable divisions and was 10% owned by a Saudi Arabian agency.
Given the banking crisis since SVB in the US, Credit Suisse has been in trouble as the international banking community began to withdraw money from the bank. The Swiss government stepped in to merge the two biggest banks in the country, but there were conditions. One of the issues was the hand of the Saudi agency was asked if he was going to buy more equity? he said no, because we already own 10%. The line no was heard around the world, the other part a few days later, if an investor owns more than 10% equity, different rules apply to the investor.
In normal circumstances bond holders have greater security than stockholders in bankruptcy or Chapter 11, but for some bondholders the regulators changed the normal method.
In a podcast by Patrick Doyle on You Tube, since the 2008 banking crisis, one of the tools in the central banks’ toolkits are bonds called addition tier 1 bank debt. Banks will have issued multiple types of equity and bonds in their operations, and some are classified as Tier 1 debt, some of the debt is Tier 2 and list goes on. The more Tier 1 debt, the better capitalized the bank. Credit Suisse had $17 billion in additional Tier 1 debt with its holders including Pimco (one of the largest holders of bonds in the world or should be sophisticated investors) and Asian funds. The additional Tier 1 was carrying a 9% interest rate and that should have sent alarm bells that if anything went wrong with the bank, the bonds were supposed to convert to shares or an equity position which would help the balance sheet. At the time of the issue, experts were thinking that the additional Tier 1 bonds would take the place of preferred shares.
Linking to dividend paying stocks, when things are going well few are concerned with the what if something goes wrong? how am I protected? when the tables turn and something goes wrong, they those who believe in the normal course of events suggest lawsuits with come. They may, but in the case above the language was written if the regulators wished to wipe out the bondholders they could. Ideally your investments go up and you are above your share purchase price which means if the shares fluctuate it is ok as long as the company can pay a dividend. When the company cannot pay, as much as you like the stock it is time to find alternatives, let the company sort itself out and then revisit it later.
There are more questions than answers, till the next time – to raising questions.