The downfall of Credit Suisse: Cantonal banks and the pension funds of SBB and Migros sue the federal government

The so-called "Rule 34" is an unofficial internet law. It states: Everything that exists or is imaginable can be found online as pornography. In English, the sentence reads: "There's porn of it, no exceptions."

The same applies to financial transactions. In this area, too, the sky's the limit, as the collapse of Credit Suisse demonstrated. When the Financial Market Supervisory Authority (FINMA) ordered the complete write-off of Credit Suisse's Additional Tier 1 (AT1) bonds, with a nominal value of over CHF 16 billion, in March 2023, the vultures of the financial world sensed an opportunity for profit.

They sought contact with AT1 investors. Although their bonds no longer exist as tradable securities due to the FINMA order, the financial speculators and specialized lawyers offered to assume the victims' legal claims. Their calculation: The written-off bonds could be reactivated and ultimately prove to be more valuable than what they had paid for.

These investors also regularly contacted institutional investors in Switzerland, as an insider reported to the "NZZ am Sonntag." In the spring of 2023, shortly after the collapse of Credit Suisse, offers for the assignment of the claims were between 5 and 10 percent of the bond's nominal value. They have since risen significantly: Currently, up to 30 percent are being offered.

The reason for this is the surprising ruling by the Federal Administrative Court in mid-October, according to which the complete write-off of the AT1 bonds was inadmissible. The Federal Supreme Court is now considering the case. For investors who have suffered losses, the question arises whether now is the right time to sell their claims.

The Federal Administrative Court received 360 complaints against the FINMA ruling, filed by approximately 3,000 individuals and companies from all over the world. The names of the individuals are hardly known. However, research by the "NZZ am Sonntag" newspaper reveals that prominent Swiss investors are among them.

Take the SBB pension fund, for example. It lost approximately $1.6 million due to the write-off. Executive board member Patrick Zuber explains his appeal against the FINMA ruling as follows: "As a pension fund, we have a fiduciary duty to our insured members to protect their assets." Zuber finds it not unusual for two federal representatives to face each other in court. "If we disagree with a decision by the Federal Tax Administration or another federal authority, we also defend ourselves in the interests of our insured members."

Several cantonal banks also suffered losses. The Fribourg Cantonal Bank lost CHF 5 million. At the Thurgauer Cantonal Bank, around 30 customers held AT1 bonds totaling CHF 2 million. However, neither bank joined the appeal before the Federal Administrative Court. The Nidwalden Cantonal Bank, on the other hand, is participating in a class-action lawsuit and expects reimbursement of the nominal amount of its CHF 1 million bond.

Zürcher Kantonalbank (ZKB), the largest publicly owned Swiss bank, is also affected. CS's AT1 bonds were part of a fund of the ZKB subsidiary Swisscanto, which invested in "hybrid bank capital." According to well-informed sources, the amount involved is in the low double-digit millions. However, ZKB and Swisscanto did not file a complaint. The media office justified this by weighing the costs and risks of a legal action against the potential benefits for investors: "Swisscanto Asset Management International SA is continuously reviewing the legal situation as part of its fiduciary duty," it stated.

It's important to note that neither ZKB nor other AT1 investors need to take legal action against FINMA to benefit from a potential reversal of the order. Should the Federal Supreme Court reverse the write-down, all investors would benefit from the ruling – even those without a lawsuit. The situation is different with claims for damages. Such proceedings, often conducted as class actions abroad, have received new impetus from the St. Gallen judges' ruling. However, only those who actively participate benefit from this. According to information from the “NZZ am Sonntag”, it cannot be ruled out that the ZKB subsidiary Swisscanto will join such a lawsuit.

Despite the anger, many investors continue to believe AT1 bonds make sense. The SBB pension fund is defending its investment, as is the Migros pension fund, which lost around CHF 100 million. Managing Director Christoph Ryter says: "We analyzed the opportunities and risks and concluded that we were well compensated for the risks we took."

In retrospect, he emphasizes that the investment decision was the right one, because despite the CS write-down, AT1s were among the best-performing asset classes in recent years. Ryter points out that the Migros pension fund has been one of the most successful in Switzerland over the long term: "Our portfolio is broadly diversified and generates above-average returns."

The Migros Pension Fund welcomed the Federal Administrative Court's decision, which confirmed that the contractually defined event for a write-down of the AT1 bonds had not occurred.