In an effort to rescue the flailing Credit Suisse, the Swiss government has enraged Swiss taxpayers who want to know how they will end up paying for the UBS-CS merger.

In the hours since news broke that UBS will buy Credit Suisse for CHF3 billion, Swiss citizens, politicians and bank shareholders have expressed their outrage – with hundreds of protesters occupying the Paradeplatz square where both banks are headquartered in Zurich.

The hardest pill to swallow for some has been that Switzerland has put up a state guarantee on the shotgun merger totaling 260 billion Swiss francs, or about one-third of the country’s GDP.

How did we get here?

For most of Switzerland, the news of the merger late Sunday evening came as a surprise. But for UBS and CS insiders, the covert deal began days before – just hours after major Credit Suisse shareholder Saudi National Bank announced that it would “absolutely not” give the bank another cent.

According to the Financial Times, the deal was conducted using intermediaries and code names for the banks. Credit Suisse used investment bank Centerview as its advisor, while UBS used former UBS banker Piero Novelli. Most interaction took place via intermediaries in the Swiss government, headed up by Swiss finance minister Karin Keller-Sutter. The finance minister acted under heavy pressure from global regulators.

“In particular, the U.S. and the French were ‘kicking the shit out of the Swiss,’ says one of the people advising UBS,” according to FT. When the CHF3 billion offer was put on the table, UBS “couldn’t refuse,” but Credit Suisse called it “unacceptable and outrageous.”

To help smooth over ruffled feathers, the government also decided to impose losses on at least CHF16 billion of CS’s tier 1 capital bonds – a move normally reserved for when shareholders receive capital as part of a merger.

Is it legal?

“The Federal Council is expropriating the shareholders without a legal basis,” according to business law professor Peter V. Kunz. Moreover, the justification for the takeover is “so thin that it would break if you challenged it,” according to Kunz.

Government officials used Articles 184 and 185 of the Swiss Constitution – policies on how Switzerland should conduct its relationships with other countries in terms of international security. Article 184 states that the Federal Council has “the competence to conduct foreign policy operatively” and is charged with taking the necessary actions “to safeguard Switzerland’s foreign policy interests.”

The text does not discuss financial or economic policy directly; the Federal Council has interpreted it as license to broker a deal in the Swiss banking sector if it protects its relations abroad. It is also the same part of the Swiss Constitution lawmakers used in 2008 to rescue then-flailing UBS with a CHF6 billion bailout.

One U.S.-based law firm announced Monday that it would represent Credit Suisse shareholders and pursue “possible legal action” after the value of Credit Suisse’s tier 1 bonds plunged to zero in the aftermath of the UBS takeover.

That suit is in addition to a class-action lawsuit alleging that Credit Suisse deceived investors by failing to disclose its significant outflows in the weeks leading up to the sale of the bank.

What was the alternative?

“The failure of a systemically relevant bank would have had severe repercussions,” said Keller-Sutter during Sunday’s press conference. “Switzerland needs to be aware of its own responsibility beyond its own borders.”

One Zurich investment advisor agrees.

“Most people don’t really realize that energy, finance, transportation – these industries are part of Switzerland’s infrastructure. It’s the backbone of the whole economy. If Swiss banking goes down, it’s basically lights out,” he told The Swiss Times.

“Switzerland was never going to let Credit Suisse go under,” the investment advisor said. “With Silicon Valley Bank collapsing just before, we now live in an uncertain world.”

Interestingly enough, Swiss cantonal banks have been reaping the early benefits of Credit Suisse’s demise, according to the expert. In the last year, cantonal banks have seen a steady stream of money coming in from former Credit Suisse clients and their share prices have reflected that. He expects small and cantonal banks will continue to profit as some Swiss move away from the newly-minted ‘monster bank.’

“Where they failed was in communication,” he added. “People have a right to know and taxpayers especially should have been informed. I have heard from people who invested their pensions in Credit Suisse. I totally get it. I would be resentful.”

Handing out bonus checks

Credit Suisse shareholders may also be incensed to hear that CS will still manage to hand out bonuses and raises to its employees this week.

“We will continue to honor our obligations and already communicated salary increases will still be effective from April 2023,” chair Axel Lehmann and chief executive Ulrich Körner communicated in a company memo Monday. “It remains critically important that you continue to come to the office or work according to your agreed pattern.”

Stay tuned.

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