Is Switzerland not trustworthy anymore?

The Swiss government faces a wave of lawsuits from Asian investors who lost billions of dollars when Credit Suisse was forced to merge with UBS in March. The investors claim that the Swiss authorities acted unlawfully and unfairly when they wiped out their bonds without sparing the shareholders.

Credit Suisse, once one of the world’s leading banks, had been struggling with several scandals and compliance issues for years.

In March, the situation became critical when the bank reported a $4.7 billion loss from its exposure to Archegos Capital, a US hedge fund that collapsed after a margin call. The Swiss financial regulator, Finma, intervened and ordered Credit Suisse to merge with its larger rival, UBS, citing the need to preserve financial stability and protect depositors.

The merger had a devastating impact on the holders of Credit Suisse’s AT1 bonds, or contingent convertibles. These are types of debt that can be converted into equity or written down to zero in the event of a bank failure.

The Swiss authorities decided to trigger the latter option, rendering the bonds worthless. According to Finma, this was justified by the “Viability Event” that occurred when the Swiss government provided extraordinary liquidity support to Credit Suisse on March 19.

However, the bondholders argue that this was an arbitrary and disproportionate decision that violated their contractual rights and the principle of equal treatment.

They point out that the terms of the bonds stipulate that bondholders should be compensated first, before shareholders, in the event of a bank failure. In reality, however, stockholders were permitted to trade their Credit Suisse shares for UBS shares at a discounted price, while bondholders received nothing.

The bondholders also question the necessity and legality of the merger itself. They claim that Credit Suisse was not insolvent or illiquid and that the Swiss authorities did not follow due process or consult with stakeholders before imposing the merger. They accuse the Swiss government of acting in the interest of UBS and its shareholders rather than in the public interest.

The bondholders are seeking compensation for their losses as well as an annulment of the merger and a restoration of their bonds. They have filed lawsuits in various jurisdictions, including Switzerland, Singapore, Hong Kong, London, and New York. Quinn Emanuel, a multinational law practice that specializes in complicated litigation, is representing them.

The firm says it has received inquiries from thousands of retail and small investors globally who have been affected by the merger.

The Swiss government has not commented directly on the lawsuits but has defended its actions as necessary and lawful. It says it acted in accordance with its mandate to ensure financial stability and protect depositors. It also says it followed international standards and best practices for dealing with failing banks.

The lawsuits are expected to take years to resolve and could have significant implications for the banking sector and the regulatory framework. They could also affect the reputation and credibility of Switzerland as a financial hub and a haven for investors.