Religion Without Sin

The Credit Strategist Blog

Investing is becoming more difficult because of the erosion of the rule of law. With increasing frequency, governments and their regulators are invoking emergency powers to eliminate shareholder and creditor rights.

The rescue deal for Credit Suisse Group AG (CS) featured two components with negative systemic consequences.

First, it allowed CS to merge into UBS Group AG (UBS) without the approval of either bank’s shareholders. This unprecedented move, chalked up to CS’s systemic importance, demonstrated that the rights of minority shareholders in a bank whose failure poses a systemic threat (or is at least deemed to do so by regulators) can be abrogated by the government. This precedent undoubtedly will be taken into account by investors in the future and certainly won’t make it easier for banks to raise equity capital. In the midst of the crisis of confidence in CS, the decision to skip a shareholder vote may seem sensible, but the disturbing precedent it sets will last long after the crisis fades.