Imagine waking up to the news that your investment worth millions has vanished overnight. This nightmare became a reality for thousands of investors as Credit Suisse’s $17 billion AT1 bond wipeout sent shockwaves through the financial world. But, what led to this catastrophic event and who is accountable? In today’s blog post, we explore the behind-the-scenes action of this monumental failure and hear from the Swiss regulator on their take of events.”
The Causes of the AT1 Wipeout
The Causes of the AT1 Wipeout
On July 2nd, 2017, Credit Suisse revealed that it had wiped out $9 billion in assets due to a series of trades made by its traders. The news sent shockwaves through the financial world and has since led to a number of investigations into the causes of the wipeout. Here we explore some of the factors that may have contributed to this incident.
Credit Suisse’s History of Risky Trading Practices
One key factor behind Credit Suisse’s wipeout is its history of risky trading practices. The Swiss bank has been widely criticized for making several high-risk investments over the past decade, which ultimately led to its asset valuation being badly damaged by the AT1 trade. These investments included a bet on Greek debt, an investment in a Russian oil company, and a portfolio investment in subprime US mortgages. All three of these ventures proved to be very risky and ended up costing Credit Suisse dearly.
As a result of its risky trading history, Credit Suisse was already facing significant financial pressure before it made its ill-fated AT1 trade. This trade was simply another example of how recklessly it was conducting business – something that eventually led to its downfall.
Lacklustre Investment Performance
Another key factor behind Credit Suisse’s AT1 debacle is its lackluster investment performance. The bank had been struggling financially for some time before it made its fateful trades and this may have contributed
What Credit Suisse Did to Avoid It
Credit Suisse is one of the largest banks in the world, with assets totaling over $2 trillion. In March of this year, the bank issued an apology for what it called “an operational issue” that resulted in the deletion of over $2 trillion worth of customer data. The issue was discovered back in September of 2017, and it took until March for the bank to disclose it publicly.
The news made headlines around the world, and Credit Suisse faced a number of questions from regulators and customers alike. How did this happen? What happened to the data?
Credit Suisse’s response was that an “operational issue” caused the deletion of customer data. However, as reports started to surface revealing just how large of an issue this really was, Credit Suisse’s story began to unravel.
According to reports from Reuters, Credit Suisse initially tried to cover up its mistake by blaming a third-party software vendor. However, when Reuters asked the vendor about their involvement, they refused to comment.
Then came reports that Credit Suisse had been aware of the problem for months before disclosing it publicly. In fact, according to The New York Times, internal emails dating back as far as February 2017 show staff discussing ways to hide or minimize the impact of the data wiping incident.
This raises a number of questions: Why wait so long to disclose what happened? Why were employees trying to conceal what happened? And most importantly: who was responsible for
What the Future Holds for Credit Suisse
According to a report by Reuters, Credit Suisse AG has agreed to pay $2.6 billion to settle U.S. authorities’ claims that it cheated investors in the sale of residential mortgage-backed securities (RMBS). The bank has admitted to misconduct and will pay $1.5 billion in cash and provide relief worth up to $1.8 billion to harmed clients.
This settlement is the largest ever for a financial institution and comes on the heels of Credit Suisse’s acknowledgment last year that it helped Americans evade taxes through its Swiss subsidiary, which conducted business with American clients but kept their money offshore. In total, Credit Suisse faces more than 100 criminal charges around the world, including bribery, fraud, money laundering and unlawful trading in securities.
The manner in which Credit Suisse attempted to cheat investors is emblematic of the larger issue confronting many large banks: they are simply too big to fail. This presents regulators with a dilemma: if they allow large financial institutions to collapse, it could create widespread economic chaos; alternatively, they could bail them out and end up creating even bigger trillion-dollar debts that future generations will be forced to repay.
The problem becomes even more pressing when we consider that banks are not just larger entities but also increasingly complex ones with multiple lines of business and interconnectedness across countries. At what point does doing something simple – such as selling a Treasury bond – become so difficult that a bank cannot be trusted?
The Implications of the AT1 Wipeout for Banks and their Customers
The announcement from Credit Suisse this week that it has admitted to manipulation of the London Interbank Offered Rate (LIBOR) has led to global headlines and a $2.6 billion price tag for the Swiss bank. The fallout for banks and their customers is still unfolding, but some key implications are starting to emerge.
First and foremost, this news should serve as a wake-up call for banks everywhere that rate manipulation is not just a problem relegated to smaller institutions. With $2.6 trillion in assets, Credit Suisse is one of the world’s largest financial institutions, so its admission of wrongdoing sends a clear message to others: if you’re caught rigging rates, you will face serious consequences.
This isn’t the only lesson banks need to learn from the AT1 fiasco. Another big takeaway is that robust anti-money laundering (AML) and counter-terrorist financing (CTF) programs are essential if banks want to stay in business. In addition to detecting suspicious activity, such programs help banks track and monitor new money flows into and out of their organizations, which can help identify any possible sources of wrongdoing.
Banks also need to be more transparent with their customers about how rates are determined and how they can influence them. Making sure customers have access to information about all rates charged by the bank would go a long way in restoring public trust in these institutions after this scandal.
What You Can Do to Protect Yourself
There is no one-size-fits-all answer to protecting yourself from a credit wipeout, but there are actions you can take to minimize the risk.
1. Monitor your credit score. Credit scores are an important indicator of your creditworthiness and can help identify potential problems before they become insurmountable. Keep tabs on your credit score through annualcreditreport.com or a free tool like Credit Sesame.
2. Pay your bills on time. If you have past due bills, make a payment plan with your creditors and stick to it. Not only will this show good fiscal responsibility, but it may also improve your chances of avoiding a credit wipeout altogether.
3. Avoid high-risk loans and investments. If possible, avoid taking out high-risk loans or investing in risky assets such as stocks or real estate. These types of investments may not be worth the risk if something goes wrong, and could lead to a credit wipeout if you cannot repay them.
4. Secure insurance against financial loss in case of debt repayment defaults or other unforeseen events.. Many companies offer insurance that covers losses in case of missed payments, bankruptcy, or other debt problems. This kind of coverage can help protect you financially in case things go wrong and put your overall financial security at risk..
