If the takeover of Credit Suisse (CS) was supposed to settle the turbulence after the collapse of the Swiss banking giant, the plan hasn’t worked.

The announcement over the weekend that Switzerland’s Federal Prosecutor is investigating potential breaches of the country’s criminal law is just one of a number of ongoing issues that are drawing in a widening network of individuals and institutions. These include:

• potential legal action from CS bondholders in the US;
• European regulators distancing themselves from the Swiss authorities’ decision to write off $17 billion of bonds;
• annual meetings this week in which UBS and CS shareholders are expected to air grievances;
• Norway’s wealth fund stating it will vote against the re-election of CS directors;
• the US Senate concluding CS violated a 2014 plea agreement with the US government;
• disquiet in the Swiss parliament over government action;
• polls showing over three quarters of Swiss citizens are opposed to the merger.

All of which leaves UBS, which purchased its former rival for $3.3 billion, with quite the headache.

Switzerland’s federal prosecutor, Steffan Blättler, is investigating whether state secrecy or industrial espionage laws were broken by government officials, regulators or senior bank executives. During negotiations to conclude the merger, sensitive information was leaked to the press. Blättler said there were “numerous aspects of events around Credit Suisse” that needed to be looked at.

Tomorrow (Tuesday 4 April) brings the Credit Suisse annual shareholder meeting. The first in-person AGM for four years, and the bank’s last after 167 years as an independent company, it will be held in a 15,000 capacity ice-hockey stadium in a Zurich suburb. Many are expecting stormy protests by citizens outside the meeting as well as heated debate inside.

Conflicts of interest

Norway’s sovereign wealth fund has said it will vote against the chair and directors of CS, and proxy advisor Glass Lewis has recommended voting against CS chair Axel Lehmann and director Blythe Masters over potential conflicts of interest.

UBS’s AGM is scheduled for Wednesday in Basel and is expected to be less tumultuous. Shares in the bank are up 10% since the merger was announced. “This fact suggests that markets at least seem untroubled by the disputes mentioned and view the deal as completed and are looking to the future,” said Rob Mason, Director of Regulatory Intelligence at Global Relay (our parent company).

The legal action is being considered by holders of additional tier 1 (AT1) bank debt. These bonds are designed to be converted into equity when a lender runs into trouble, and form part of the debt provision banks must retain to absorb shocks in times of crisis. While AT1 bond holders factor in the chance of losing money, in this instance they have been wiped out. To rub salt into the wound shareholders, who would normally be behind AT1 bondholders in the queue, have been offered compensation.

The wider effect of the write-down could well be that the cost of AT1 debt rises in future. “The message has clearly been sent that if a bank appears to be in trouble – and the definition of trouble now includes ‘loss of confidence’ in addition to solvency and liquidity considerations – AT1 holders will immediately price in a high probability of resolution,” Jerry del Missier, CIO at Copper Street Capital, told The Guardian.

European regulators

European regulators have also distanced themselves from the decision to write down the bonds. Dominique Laboureix, chair of the EU’s Single Resolution Board (SRB), said: “we would follow the hierarchy, and we wanted to tell it very clearly to the investors, to avoid to be misunderstood: we have no choice but to respect this hierarchy”.

The SRB had already issued a joint statement with the ECB and EBA saying that “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down.”

While Switzerland is not part of the EU, and is therefore not subject to EU regulation, the stance of EU regulators will inevitably have some impact as debate continues about the merger.

Mason thinks the write-down move “may well have a been a political decision to ease the opposition by Swiss citizens to the merger, many of whom are shareholders, but this resulted in bondholders feeling more of the pain.”

Violation of rules

Meanwhile the US Senate Finance Committee has released results of an investigation into Credit Suisse that says the bank violated a 2014 plea deal with the US government by failing to disclose nearly $100m in secret offshore accounts held by a single family. If proved, the charges could lead to one of the largest penalties for violations of foreign bank account registration rules in US history.

The deal saw Credit Suisse agree to pay $1.3 billion of a $2.6 billion fine after agreeing to comply with disclosure rules. But whistleblowers alerted US authorities to what they claim was action by the bank to help the family continue to evade tax. Including hiding US citizenship on paperwork and quietly closing accounts and moving funds.

“The bank’s demise does not erase its liabilities. UBS assumed those liabilities,” said Jeffrey Neiman, a lawyer representing the whistleblowers, told the Financial Times.

Up to 36,000 jobs worldwide are thought to be at risk, with nearly 11,000 at risk in Switzerland alone. If cuts at that level are made, the new bank will have axed 30% of its global workforce.

Ermotti returns

Wednesday’s UBS AGM will also see the return of Sergio Ermotti, who is being brought back as CEO. Ermotti left to take up the role of chairman at Swiss Re in 2020 after nine years at the helm of CS. UBS Chairman Colm Kelleher said the board felt Ermotti was “better suited to navigating these things” than current CEO Ralph Hamers, who will remain at the bank during the transition period.

Ermotti is widely credited with having changed the culture of UBS during his time in charge, and was once quoted as saying: “The riskiest part of our business nowadays is operational risks. But one thing that really hurt in the last 10 years of our industry is operational risks, not credit or market risks. If you do something wrong as a bank, or you have people doing bad things within the bank, it costs you much more than any credit risk or market position.”