Rene Philippe Dubout Esq. connect@fintechsetup.com
On March 19, 2023, Switzerland saw a breach of its long-standing reputation for legal certainty. The Legal 500 website highlights Switzerland’s legal system as one of the country’s best features, with stability, predictability, and adherence to the rule of law being crucial for doing business. Switzerland’s political system, based on concord, discussion, and dispersion of power, makes it difficult for any political force to change laws. Public participation rights serve an important oversight function, further strengthening the country’s legal stability. This is why many businessmen choose to refer to Switzerland’s international private law and/or substantive law for their contracts and disputes, even if the transaction has nothing to do with Switzerland.
However, the Swiss government’s decision to ignore shareholders’ rights to approve the UBS and Credit Suisse merger and its terms has broken this stability. Additionally, the value of the 16 billion AT1 bonds was wiped out to zero, with bondholders receiving a total loss, while shareholders partially recovered their losses. Although the bonds stipulated that regulators would not be required to follow any order of priority in the event of a bankruptcy, this decision sets a worrying precedent. In the normal order of things, shareholders’ value should be wiped out first, followed by bond value. Allowing shareholders to recover part of their losses while rendering the bonds worthless is an unfair decision that (while inherent to the bonds conditions) undermines the predictability and consistency of Switzerland’s legal system.
The paradox of the Conseil Federal’s decision is that it was made to avoid the partial or full nationalization of Credit Suisse, at least it is the Conseil Federal excuse for the mess. The rationale being that nationalization is a more commonly accepted practice in countries like France but would have been unprecedented for Switzerland. However, in the long term, wiping out shareholders’ and bondholders’ rights in the context of a nationalization could have been a more palatable solution than wiping out their rights in the handover of Credit Suisse to its main competitor.
Besides, a full nationalization was not needed. The Conseil Federal and the Swiss National Bank could have adopted part of the playbook they used to save UBS in 2008. For example, the SNB could have taken a 30 to 40% shareholding into Credit Suisse through an increase of capital of the bank, in addition of the line of credit already offered. This would have certainly reassured the markets and provided a window of time to clean up Credit Suisse, sell off all the toxics businesses division and eventually return the bank to profitability, up to the point when SNB could have sold its shares. While this solution may have come at a cost to taxpayers (actually SNB made a profit in saving UBS), it would have in our opinion been less damageable for Swiss reputation.
In summary, instead to use and adapt the playbook that saved UBS in 2008 the Conseil Federal’s has shown a critical lack of foresight, thrown the baby with the water of the bath, and scandalously chosen a solution that will have far-reaching repercussions, including the creation of a banking monopoly in Switzerland, job losses for thousands of employees, and losses for small shareholders and bondholders and the resulting lawsuits that will in Switzerland and abroad drag this mess for year.
The Conseil Federal’s decision to create a banking monster in playing the role of Dr. Frankenstein is a short-sighted move that will prove to be detrimental in the long run. As we all know, financial crises are cyclical, and UBS monster is likely to require a bailout at some point in the future.
However, the long-lasting impact on Switzerland’s reputation as a country of high legal certainty will be the most significant consequence. The stability and predictability of Switzerland’s legal system have been crucial for the country’s success, and it remains to be seen how these recent developments will affect its reputation and attractiveness as a destination for business and investment.
To exchange with the author
Rene Philippe Dubout Esq. connect@fintechsetup.com
