Credit Suisse: Brady Dougan Was Right After All

Brady Dougan, Ex-CEO Credit Suisse

Brady Dougan, Ex-CEO Credit Suisse

It has been a while since both the two  big Swiss banks have been called safe havens. Not after UBS had to call the government for help during the financial meltdown.

But Swiss safe havens was the stamp of quality Morgan Stanley attributed the CoCo-bonds of UBS and Credit Suisse (CS) recently. This is a little surprising.

A few months ago, CS was castigated for its reliance on this instrument. Brady Dougan, the former chief executive of CS, had his bank use the contingent convertible bonds extensively. CoCos are converted into equity once a pre-specified event takes place, the so-called trigger. That way, CS hoped to convert debt into equity in case of an emergency, preventing a potential bankruptcy.

In Good Shape? In Good Shape!

CEO Dougan had been convinced that CS was in good shape, thanks to the CoCos.

The too-big-to-fail provisions enacted by the Swiss government changed the rules of the game. The Finance Ministry told the big banks in February 2015 to bolster their equity until 2019 and to replace the old convertible bonds.

With the release of the details in October 2015, it became apparent just how much more capital the two banks needed to satisfy the governments new requirements: to maintain their business in a situation of stress, UBS was told to raised 2.3 billion francs and CS 5.2 billion.

New Capital Required

With the new rules, the banking giants which have dominated the Swiss financial services industry for a long time, suddenly looked short of capital.

Not many days later, Dougan's-successor Tidjane Thiam asked the shareholders of the bank to inject 6 billion francs in new capital. And under the new circumstances, Dougan's conviction that CS was perfectly balanced looked pretty awkward.

Hearing on Amendment

However, on December 22 the Finance Ministry initiated a hearing on the amendment of the too-big-to-fail provisions, with a closing date of February 15, 2016.

With the amendment, Dougan may be exonerated after all. In the circular, the government makes clear that until 2019, the banks are allowed to count the convertible bonds as capital, and not just that, but as instruments of the highest quality.

Sudden Reevaluation

We are talking about big money here: according to the two banks' balance sheets for the third quarter, they have an aggregate 18 billion francs in «Tier 2» bonds outstanding, making the companies equity sheets look much more solid. This will make shareholders very happy. After all, Morgan Stanley thinks Credit Suisse shares are «best value» again – worth investing your money in.

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