Credit Suisse bondholders sue

This is an audio transcript of the FT News Briefing podcast episode: ‘Credit Suisse bondholders sue’

Sonja Hutson
Good morning from the Financial Times. Today is Friday, April 21st. And this is your FT News Briefing.

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Credit Suisse bondholders are suing the Swiss banking regulator. US regional banks have stabilised after the collapse of Silicon Valley Bank, but the news isn’t all good. Plus, we look at the impact that the US court battle over an abortion pill could have on the future of the drug industry. I’m Sonja Hutson, in for Marc Filipino, and here’s the news you need to start your day.

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Former Credit Suisse bondholders are suing Switzerland’s banking regulator, Finma. The bondholders are upset over the recent sale of the bank to rival UBS. That sale wiped out the value of $17bn worth of convertible bonds. But investors who owned equity in the bank were able to hold on to some of their stocks’ value. Here’s the FT’s Austria and Switzerland correspondent Sam Jones.

Sam Jones
Now, in any, any kind of standardised debt waterfall, any kind of bankruptcy process the world over, everyone knows that equity holders are subordinate to debt holders. So the question is why was it proportionate that equity holders in this situation should be given some value but debt holders not? And that issue of proportionality specifically highlighted in the Swiss constitution. So the case says that Finma as an organ of the Swiss state is obliged to follow these constitutional principles.

Sonja Hutson
So, Sam, what are the broader implications of this case? How significant is it?

Sam Jones
I mean, it’s hugely significant, really, because this is Switzerland, you know, and Switzerland is thought of as being a place where, really as a bond holder, you’d never have to worry about your assets being expropriated in some kind of extraordinary situation. Now, what bondholders are trying to do is claim that this is exactly that. This is an expropriated act by the Swiss government and that they deserve compensation as a result. Whether some of those claims are true or not, who knows? And obviously the Swiss government has a very particular view on that, that it disputes strongly that this was an emergency situation to save a bank that could have had catastrophic consequences if it had not been dealt with. But this case is really going to be a thorn in the side of Switzerland and the Swiss government as they continue and try to claw back some of the reputational damage that has been done by Credit Suisse’s collapse.

Sonja Hutson
That’s the FT’s Sam Jones.

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During last month’s banking turmoil, people rushed to take their money out of regional lenders. But now, first-quarter earnings reports out this week are showing that deposit flight wasn’t quite as bad as expected. The FT’s Stephen Gandel has been reporting on this, and he joins me now. Hi, Stephen.

Stephen Gandel
Hi.

Sonja Hutson
So why do you think there was less money leaving these regional banks than we initially thought?

Stephen Gandel
You know, what everyone was watching was what was going on at Silicon Valley. And it appears they, you know, they were the extreme. They had a much different business model than most regional lenders tied very closely to the health of start-ups in Silicon Valley, which is part of the economy that’s been hurt the worst in the last year as interest rates have risen. And so I think what we didn’t realise is that many other regional lenders were more diversified than Silicon Valley. Now, that being said, I think worries continue for regional lenders in terms of profitability and whether they are sitting on some bad loans when it comes to lending to commercial real estate developers.

Sonja Hutson
Steven, are the regional banks stable now? I mean, how are they doing overall?

Stephen Gandel
It seems that they are stable. There’s ample evidence that’s come out from these first-quarter earnings reports that it doesn’t appear that many others are going to go the way of Silicon Valley Bank. But what the earnings reports do show is that the profit picture going forward for them, it’s worse than we thought before Silicon Valley. Their profits are shrinking much faster. At some of the banks we’ve seen profits fall 40, 50 per cent. And the reason is, is because for regional banks that long lived on their relationships — local customers, small businesses. They kept their money at these banks and didn’t expect much in return other than services and processing their transactions. Now, with this kind of added risk that they saw in Silicon Valley, depositors want to get paid something for keeping their money there. And what that means is that they have to pay higher interest rates. And if they have to pay up more from deposits, that means that’s less money that they make from the lending they do. And what we’re watching for is whether that shrinks to the point where some of these banks say, hey, you know, maybe we can’t, maybe it’s not worth it for us.

Sonja Hutson
Stephen Gandel is the FT’s US banking correspondent. Thanks, Stephen.

Sam Jones
Thank you.

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Sonja Hutson
The abortion pill mifepristone was given approval for use by the US Food and Drug Administration more than two decades ago. But recently, a federal judge in Texas overturned its regulatory approval, which in effect created a nationwide ban. That ban was put on hold temporarily. Now, the US Supreme Court is expected to rule today on whether to keep the drug available while the legal battle over it continues to play out. The FT’s Brooke Masters argues the battle may have a chilling effect on innovation in the US. She joins me now to talk more about this. Hi, Brooke.

Brooke Masters
Hi.

Sonja Hutson
So how do you see this battle impacting pharmaceutical investment in the US?

Brooke Masters
Well, it’s really interesting. The entire pharmaceutical industry is up in arms over this because what’s happened is that the judge who said stop selling mifepristone basically did something that hasn’t been done in a century and substituted his own judgment for the FDA’s expert opinion on what’s safe. And the drug industry says if a judge can do that to the abortion pill, they can do it to anything. And so how are we supposed to invest and develop cutting-edge drugs with the knowledge that some day some judge who will say is an anti-vaxxer doesn’t want me to produce it later?

Sonja Hutson
What kind of global impact could this have?

Brooke Masters
It’s huge for two reasons. The FDA has long been seen as the sort of gold standard of drug approval dating back really into the 60s. And therefore, if its authority is undermined, it makes the whole process of drug development more complicated, particularly for countries that really can’t afford to have their own really strong drug protection rules. They tend to rely on the FDA. And if the FDA is suddenly called into question, it has a real problem. Also, you know, half of all the big companies that spend the most R&D money on drug development are American companies. So they can’t develop at home. They’re going to have to go abroad. And that’s really bad.

Sonja Hutson
Brooke Masters is the FT’s US financial editor. Thanks, Brooke.

Brooke Masters
Thanks for having me.

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Sonja Hutson
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Marc Filippino, Fiona Symon and me, Sonja Hutson. Our editor is Jess Smith. We had help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.