Credit Suisse takeover governance process ‘disastrous’

'Inversion of the normal hierarchy of claims will not go down well with institutional investors'

UBS’s takeover by Credit Suisse has been labelled an example of “disastrous” governance, in a deal that raises questions about the preferential treatment of some shareholders at the expense of others who will lose everything.

Jerome Legras, head of research at Axiom Alternative Investments, an asset manager specialising in the European financial sector, said the acquisition jeopardises the credibility of the Swiss authorities and Zurich as a global financial centre.

Legras said: “The governance process has been disastrous: not only have shareholders been bypassed, by both UBS and Credit Suisse, but a last-minute law was passed to do this.”

Questions will be raised as to the possibility prominent shareholders used their leverage as clients to tweak the deal in their favour at the expense of bondholders, he added.

The deal, announced on Sunday 19 March, sees UBS take over Credit Suisse for CHF3bn ($3.23bn) in stock, and assume up to CHF5bn ($5.4bn) in losses.

It was hastily arranged after Credit Suisse clients and financial backers lost confidence in the bank and deserted it in droves, following a negative annual report and a series of high-profile scandals.

Low-ranking bondholders, with CHF16 billion ($17bn) invested, have been wiped out and will lose everything in the deal.

However Credit Suisse shareholders get the equivalent of CHF0.76 per share, which is still 59% less than what they were worth before the takeover.

Legras said: “The fact that AT1 bondholders have been wiped out when shareholders got $3bn is an obvious inversion of the normal hierarchy of claims and will not go down well with institutional investors.”

The so-called “Swiss finish” – the Swiss interpretation of Basel rules to allow this usual takeover – will be called into question as a result, Legras said.

Legal proceedings are expected to drag on for a long time, with “vulture” investors already buying AT1 claims.

Credit Suisse scandals

Credit Suisse has faced a series of scandals leading up to its forced takeover, going all the way back to February 2020 when its CEO Tidjane Thiam’s five-year tenure at the helm ended abruptly after an investigation found the bank hired private detectives to spy on its former head of wealth management Iqbal Khan, who had left to work for UBS.

More recently, in news that helped trigger the loss of confidence that led to the firesale deal with UBS, Credit Sussie admitted in its annual report “material weaknesses” in its financial controls.

Clement Miglietti, chief product officer, NeoXam, a global financial software company for the asset management sector, said: “It is hard to think of another issue that has been deliberated over more in recent times than the need for accurate financial reporting

“Having accurate and timely reporting may not solve all the headaches financial institutions face, but it does at least allow them to focus their efforts on expanding services to investors.”

Guillaume Durin, campaigner with Switzerland-based climate action group BreakFree Suisse, said the crisis in which Credit Suisse has sunk is cultural, that “stems from a disastrous system of values and practices that has been repeatedly denounced, sometimes even from within”. 

In July 2021, the then chairman of the executive board, Antonio Horta Osorio, sent an email to the bank’s 50,000 employees acknowledging a general cultural problem and the need to address it. 

Durin said: “Apart from a few reforms that did not tackle the structural issue, the CEO at the time, Thomas Gottstein, made sure that this challenge had no consequences.

“Each time it was accused, Credit Suisse management’s line of defence was: 1) these are isolated acts; 2) the control rules are now reinforced.

“The collapse of Credit Suisse is in fact that of the archetype of a “cannibal capitalism” based on the pursuit of profit at all costs, on the poison of collusion as well as on a poor ethics of consequences.”