When UBS snapped up Credit Suisse for a cool $3.3 billion, the Swiss government sighed a breath of relief. The acquisition seemed to temporarily stave off a European banking crisis.
However, the relief was short-lived. Now, with $9 billion in legal claims already pounding on the door, this supposed win might be more of a hefty price tag for UBS than a crown jewel.
The Core Controversy: The Debt Crisis
At the center of this brewing storm lies the controversial decision surrounding Credit Suisse’s $17 billion debt.
This massive amount was abruptly nullified during the rescue mission, spelling losses for many debt investors. Shareholders, too, were left clutching at straws, getting only about 10% of what they would’ve reaped three years earlier.
The blame game has begun. Fingers point in all directions – toward Finma, the Swiss regulator that greenlit the zeroing of Credit Suisse’s bonds, the Swiss government, which played puppeteer in the deal’s orchestration, and of course, UBS.
Finma, for the most part, has borne the brunt. Their decision to wipe out AT1s, bank debts convertible to equity when trouble brews, has raised eyebrows and temperaments alike.
Critics argue the viability event, which should have served as a red flag for such an action, never occurred. Finma, they suggest, might have acted prematurely and recklessly.
Adding to their questionable decision-making, they also flipped the capital hierarchy script, giving equity investors some value, but leaving AT1 investors high and dry.
While Finma defends their actions, arguing it was necessary for the UBS-Credit Suisse deal, their strategy has been met with dissent and distrust.
International law firms, like Quinn Emanuel Urquhart & Sullivan, have already begun rallying the troops. They’ve launched complaints on behalf of over 1,000 investors.
Not far behind is the London-based firm Pallas, representing close to 800 aggrieved claimants. The Asian market, too, has piped in, with firms Withers and Drew & Napier in Singapore stepping into the legal battlefield.
Switzerland and UBS: Under Legal Siege
Switzerland, not just Finma, finds itself in hot water. The International Centre for Settlement of Investment Disputes in Washington DC has become a hub for assembling arbitration claims against the country.
These claims leverage the investment treaties Switzerland shares with over 120 nations.
Aimed initially to guard investors against rash governmental decisions, these treaties are now being used by emerging market investors to challenge Switzerland’s controversial rescue operation.
UBS, the supposed chief beneficiary of this merger, isn’t immune from the backlash either. Pallas is gearing up to challenge UBS in Swiss courts over the AT1 bond write-downs.
Their argument? It’s a cop-out for UBS to hide behind the ‘we were just following orders’ excuse. And with UBS recently revealing a staggering $29 billion quarterly profit, almost entirely stemming from the Credit Suisse deal, critics argue the bank got a premium asset at basement prices.
In hindsight, the merger’s optics are less “historic union” and more “fire sale.” The price UBS paid for Credit Suisse stands starkly below the bank’s market value just before the deal ink dried.
The journey ahead for UBS appears to be a rough one. Legal wrangling threatens to be a significant thorn in their side as they navigate the post-merger waters.
While acquisitions of this magnitude are challenging in the best of times, the looming shadow of endless court battles promises to make this union one for the banking history books – but perhaps for all the wrong reasons.
