Fannie Mae-No Politics (FNMA)

[Robert from yahoo bd]

Politics may end up being more important than the 'Capital Stack':

WSJ today: "Switzerland's decision to give priority to shareholders over some bondholders in its rescue of Credit Suisse is counterintuitive for finance folk. But it has a political logic and, in bank failures, politics matters."

"The exceptions are aggrieved bondholders who will be wiped out even as shareholders can expect a modest $3.25 billion payout. A company's equity is typically considered the riskiest part of its capital structure and the lowest ranking in the hierarchy of creditor claims. But the Swiss regulator chose to write off Credit Suisse's roughly $17 billion worth of additional tier 1 (AT1) debt.

Its legal basis for doing so is up for debate. Documentation for the so-called bail-in bonds appears to allow the regulator broad sway to do what it likes in an emergency, as you might expect of a security designed after the 2008 financial crisis precisely to provide a capital buffer in times such as these."

"Lawyers will presumably argue over the fine print for years.

So why did Switzerland put the stock first? The readiest explanation seems to be politics. AT1 bondholders, being global financial institutions, made an easier target than shareholders, who tend to include ordinary citizens. Credit Suisse's top shareholders are also from the Middle East, a region that gives plenty of business to Swiss private banks.

The deal needed capital from somewhere to add up for UBS. The Swiss government was desperate to avoid the appearance that this was a taxpayer-funded bailout.

There is a wider lesson here: Too-big-to-fail bank failures are inevitably political, leading to potential conflicts with the financial agenda. Could the pattern be repeated in future bank collapses?"