Bailout Blues: The Write-Down of the AT1 Bonds in the Credit Suisse Bailout

Abstract

The recent bailout of Credit Suisse is noteworthy for many reasons. One of them is that, while AT1 bondholders were wiped out, shareholders were not. This violates the ‘absolute priority rule’ which is central to corporate reorganisation and bank resolution regimes. In this article, we analyse the motives and mechanics of the write-down and argue that, given the bond terms, the prospect for a legal challenge by the bondholders is slim. At the same time, we question the merits of the write-down. Bondholders should fare no worse than common equity, regardless of whether a financial institution is put in an insolvency proceeding or bailed out, and the applicable bond terms should reflect this. We also raise the issue of a more principled approach to bailouts more generally.