On Monday, a specific type of bond held by Credit Suisse investors sparked panic throughout the financial world. Known as AT1 (Additional Tier 1) bonds, they are a type of convertible bonds that were invented following the 2008 collapse, to provide an avenue of high-yield investment, but also a supposedly “safe” option, as they would automatically convert to bank equity and take a loss in times of financial squeeze. They are also known as “contingent convertibles” or “CoCos”. Credit Suisse had a $17 billion worth of these before Monday, but as part of the reorganization and sale to UBS, the $17 billion in bonds was written off down to $0 the same day.
The Economist and every other financial guru is screaming about how this type of liquidation was not supposed to happen, as the AT1 bonds were to be safer and were not supposed to be written off before the stockholders (Credit Suisse stockholders suffered smaller losses than the AT1 bondholders). In fact, one law firm is even considering filing suit against Credit Suisse for not better protecting its AT1 bondholders. (Talk about delusional!)
