TOO MANY LAWYERS AND NOT ENOUGH ECONOMISTS IN BERN.

Banks failing: Lessons learnt from Credit Sussie collapse. Part 2.

WRITTEN BY

Two bailouts in just 15 years

UBS in 2008 and now Credit Sussie.

"“Never again” was the mantra and the goal was to bring Swiss laws in line with other frameworks (namely the U.S. and the EU) and to follow international financial recommendations (i.e., the Basel accords). The Swiss regulator sought to shore up the stability of the system and bring it in line with international capital market standards, in hopes of bolstering the attractiveness of the Swiss financial marketplace."

The bank takeover and its consequences

How did FINMA orchestrate UBS’ absorption of Credit Suisse? FINMA decided to write off Tier 1 capital, tout simplement. This financial instrument was created by the international regulatory community after the 2008 financial meltdown to guarantee banks would have access to capital in case of distress.

The idea is quite simple: Tier 1 works as a bond, but if and when the bank needs capital, they get converted into shares. This conversion carries extra risk that is compensated by a risk premium. The market expected Tier 1 bonds (dubbed “CoCos” for ‘contingent convertible bonds’) to be—in one way or another—converted into stock or compensated in some other way. Nein! FINMA decided to write the bonds off instead, with two lasting repercussions.

First, the decision might sound the death knell for CoCos (or Tier 1) as an asset class. Who’s going to trust them now? Conventional wisdom says that investing in shares of stock is riskier than holding bonds. But FINMA just unilaterally decided to wipe out $100 billion in bondholder wealth. So a tenet of investing wisdom has been turned on its head.

Second, the Swiss authority has put national interests ahead of international credibility. Finance has another truism: “Banks are international in life, but national in death”. FINMA has sent a scary message to investors, which may cut the legs out of a market that has proven to be efficient in preventing bank failures. The decision, to its credit, seems to have halted (or at least slowed) the spread of bank failures that ignited in the United States with the collapse of Silicon Valley Bank. In a recent speech, President Biden’s response was unequivocal: “Investors in the banks will not be protected. They knowingly took a risk, and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”

"So FINMA has an army of fantastic lawyers to explain their way out of trouble. But what are economists saying about the deal? Is it good for the Swiss economy? Economists could provide a better understanding of the financial engineering, how markets operate and the dynamic behind it, which would help to predict and anticipate events in the future. Maybe there are too many lawyers and not enough economists in Bern. While law and economics is a well-established discipline in the U.S. and other countries, Switzerland seems to be clinging to an antiquated legal interpretation of events."

SOURCE:

https://hospitalityinsights.ehl.edu/banks-failing-lessons-learnt-credit-suisse-collapse-part-2

Comments

Ceasefires, Fireworks, and the Fine Art of Calling Ashes “Peace”

There is something almost poetic about declaring victory while the smoke is still rising. Not poetic in the romantic sense—more in the way a press release can be mistaken for reality if repeated often enough. So here we are. Another “ceasefire.” Another “agreement.” Another feather in the ever-expanding, never-examined peacemaking cap of Donald Trump . Israel–Iran. Israel–Hezbollah. Israel–Hamas. One could be forgiven for thinking peace has broken out everywhere—if peace meant pauses between airstrikes . The Theater of Victory On cue, Benjamin Netanyahu steps forward, flanked by ministers who speak the language of triumph as if it were immune to contradiction. “Iran weakened.” “Hezbollah contained.” “Total victory.” It all sounds remarkably similar to past declarations—just before the next round of fighting. Because here’s the inconvenient detail buried beneath the applause: none of the stated objectives were actually achieved. Iran still has its missiles. Hezboll...

The Endurance War: When Pain Becomes Strategy

There are wars fought with missiles. There are wars fought with money. And then there are wars like this one— where the real battlefield is human endurance , and the real weapon is pain tolerance . The blockade of the Strait of Hormuz is being presented as a masterstroke by —a clean, calculated move to choke Iran’s economic lifeline. But beneath the polished language of “strategic pressure” lies a far simpler, far more uncomfortable truth: This is not a test of power. It is a test of who can suffer longer. And in that contest, Washington may have chosen the wrong opponent. The Fantasy of Economic Collapse The theory is elegant: Strangle oil exports Collapse revenue Trigger unrest Force surrender It is also, historically speaking, remarkably ineffective . A major study by RAND Corporation on coercive economic strategies concluded that: “ Economic sanctions alone rarely achieve major political objectives, particularly against regimes with strong internal sec...

When a Constitution Becomes a Decorative Document America’s Latest War, and the Curious Death of Accountability

There is an imperial comedy unfolding before the world — dark enough to be tragedy, absurd enough to be satire. This is, after all, the very “model democracy” United States has spent decades promising to export to humanity — by missile, by occupation, by sanctions, by “shock and awe,” by solemn lectures on liberty delivered from polished podiums standing atop broken nations. This was the sermon preached to Iraq. Imposed on Afghanistan. Invoked amid the destruction of Libya . Entangled in the agony of Syria. Echoed through the devastation of Yemen. The doctrine was always wrapped in noble language: Rule of law. Democratic institutions. Constitutional order. Checks and balances. How magnificent those words sound — right up until power decides they are optional at home. What a remarkable export product: A democracy where Congress yields, courts hesitate, executive power expands, wars begin first and legal arguments arrive later — wrapped in flags, marketed...

The Confession Without Consequence When Empire Admits the Crime… and Funds It Anyway

There are moments in history when power accidentally tells the truth. Not because conscience triumphs. Not because morality suddenly awakens. But because the wreckage becomes too vast to keep describing as “complicated.” That moment arrived when — a pillar of Washington’s foreign policy establishment, veteran diplomat, architect of negotiations, insider to empire’s machinery — uttered words that would once have been politically unthinkable: “ Prime Minister Netanyahu has led us down a road — and we have been part of it — that has, in essence, created a genocide in Gaza that has destabilize d the Middle East.” Read that again. Not they . We. Not Israel alone . We have been part of it. That single phrase — “we have been part of it” — may be one of the most consequential admissions made by a former senior American official in modern Middle Eastern history. For decades, Washington supplied the bombs, shielded the diplomacy, vetoed accountability, framed slaughter as...

When the Readers Move Ahead of the Columnist

There is something quietly seismic happening—not in the corridors of power, not in carefully worded opinion columns, but in the comment sections beneath them. While attempts to diagnose where Israel “lost its way,” the readers seem to be asking a far more unsettling question: What if it didn’t lose its way at all? What if this is the way? For decades, the comforting narrative was simple: the problem was leadership. Replace , and the moral arc would gently correct itself. Peace would again become plausible. Restraint would return. The “real Israel” would re-emerge. But the readers are no longer convinced. They are pointing to something deeper—something less convenient. Not a deviation. A pattern. Not an exception. A structure. Because when policies persist across decades, across governments, across crises—at what point do we stop calling them mistakes and start calling them design? The Quiet Collapse of a Narrative One reader puts it bluntly: Palestinians have alr...

Ainnbeen

Search This Blog