“Italy is amazed at the arrogance of Switzerland”

In Italy, a country with a long history of bank failures, the forced merger of UBS and Credit Suisse has caused wonder and certainty: This is not the end of the story, as Italian finance expert Gabriele La Monica tells us explained.

“What is most astounding is the complacent nature of the Swiss authorities, who expect the world to accept uncritically a transaction that undermines many of the rules governing international finance,” it says Gabriel LaMonica to the point. He heads the Milan office of the Italian news agency «Milan Finance (MF)/Dow Jones».

Like the best in class caught cheating, Switzerland seems intent on sweeping the causes that led to this situation under the rug, says La Monica. Around Dante to quote, one probably said in Berne: «Vuolsi così colà dove si puote, ciò che si vuole, e più non dimandare». In German: “So, where you can do what you want, don’t ask anymore.”

Endless litigation

The write-down of the CHF 15.8 billion equivalent of Additional Tier 1 bonds will lead to endless legal battles, La Monica believes, especially since the Swiss Financial Market Supervisory Authority (Finma) stated that these bonds reset to zero in the event of a profitability event would. These bonds were designed as a loss absorbing mechanism.

Gabriel La Monica 1555

Gabriele La Monica (Image: MF/Dow Jones)

In other words, only when Credit Suisse (CS) is confronted with a capital shortfall do these bonds come into play, as their write-down strengthens the bank’s financial position and thus reduces liabilities. The CS bond prospectus states that this clause is triggered if the equity ratio falls below 7 percent. But this was never the case.

Against all financial and legal logic

The mere fact that such financial instruments are mainly in the portfolios of institutional investors prevented desperate bondholders from demonstrating in front of the bank’s headquarters, says La Monica.

Under these premises, the Swiss authorities have quite effectively decided to sacrifice these bonds and partially protect equity, which violates all financial and legal logic, as La Monica notes. From this he concludes: “Equity is considered “venture capital” – from now on, a clause should be added that reads: “Unless a sovereign wealth fund of a Gulf state is involved.”

Animal farm

In fact, the two CS shareholders, the Saudi National Bank (SNB) and the Qatar Authority, hold the largest shares with 10 percent and 7 percent of the capital respectively. Around George Orwell’s To paraphrase “animal farm” can be deduced from the fact that “all partners are equal, but some partners are more equal than others”.

As the recent World Cup has clearly demonstrated, the power of petrodollars tends to soften some judgements. The 3 billion Swiss francs that UBS is paying for CS are clearly too low, says La Monica. This opinion also shares David SerraFounder and CEO of the international asset manager Algebris.

legions of lawyers

He says: «UBS has done the business of its life. Never in history has a bank increased its net asset value by 70 percent overnight. This will be very positive for all UBS stakeholders,” said Serra

Conversely, it is easy to imagine legions of lawyers already at work filing lawsuits against CS, given that this transaction took place essentially without a single partner being contacted, as La Monica points out.

A state and its subjects

He also points out that corporate governance was wiped out in a single weekend, in favor of a kind of socialist paternalism, in which the state saves its “subjects” from grappling with issues they might not understand, and at the risk of doing so agrees to make a wrong decision himself.

“A decision where it is not clear whether it is grotesque or rather amateurish,” says La Monica, adding: “It will not be easy for Switzerland to get out of this impasse.”

risk of a crisis of confidence

The sensitive timing (high inflation, imminent recession, Ukraine war), the complexity of the transaction and the reputation that Switzerland enjoys in the global financial world have so far prevented overly loud reactions, as La Monica suspects.

However, should the pattern of this deal be confirmed, which for many people is a “dissolution disguised as a rescue operation”, there is a risk that a crisis of confidence would be triggered that would affect every banking institution and would have consequences for Switzerland that are still unimaginable today, explains la monica

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