A quite bizarre piece of news has recently hit the investor community which is not really being addressed by the financial media. I assume the reason that it's not being covered by the financial media is because it deals with a complex issue involving bank regulators. But we will try to outline the issue regardless, says Avi Gilburt, founder of ElliottWaveTrader.net.
According to the Financial Times, FINMA, which is the Swiss financial regulator, blocked the disclosure of key documents to the former holders of Credit Suisse's AT1 notes who are suing FINMA for the write-down of CS's AT1s. This directed write-down went outside the published order of priority for debt/equity holders.
Clearly, this affected the investment value of the former holders of CS's AT1 notes. And, in our view, such a move by the regulator may potentially have further undermined confidence in global banking regulators.
First, let's review how the CS drama developed. The bank released its 2022 annual report on March 14, 2023, and it noted that it had found a significant flaw in its reporting practices that raised the possibility of misstatement risks. The chairman of the Saudi National Bank, which was a significant shareholder in CS's equity, disclaimed any further increases in the bank's stake the following day.
The share price of the bank dropped once more as a result, and the US Treasury Department began examining the financial sector's exposure to CS. At least four sizable banks reportedly restricted trade with CS. The French bank BNP Paribas informed clients that it would no longer accept requests to take over their derivative contracts where CS is the counterparty. On March 19, 2023, UBS Group AG (UBS) announced plans to acquire CS.
FINMA then instructed CS to write down all the bank's AT1 instruments ($17B) while equity shareholders received their payouts from the deal with UBS. According to many legal experts, this decision clearly contradicted the global banking supervision rules, which were created after the Great Financial Crisis of 2007-2009 and were designed to avoid major banking crises.
As a result, the holders of CS's AT1 filed $9B of legal claims (the amount of the write-down). The lawsuit identified three legal targets: FINMA, the Swiss Government, and UBS, with FINMA being the main target of the lawsuits.
The investors requested the disclosure of the documents that led to FINMA's decision to write down the AT1s. However, the Swiss regulator made what some may view as a potentially ridiculous move and blocked this disclosure.
In our view, FINMA's decision is another wake-up call for those who are relying on FDIC protection and for those who believe that the largest US banks will be saved by the regulator when the next major financial crisis develops. Make no mistake about it: Regulators can and will make any decision in a crisis environment, even the most unexpected and bizarre ones, which may often benefit their position rather than those whom they are designed to protect.
So, the best course of action for investors is to find the safest banks possible. At the end of the day, we're speaking of protecting your hard-earned money.
