quote:

Credit Suisse failed this weekend — or at least it would have, were it not too big to fail. Instead, Switzerland's banking regulators cobbled together an emergency solution that leaves nobody happy — but at least prevents a catastrophe for the global financial system.

Why it matters: The 30 G-SIBs — global systemically important banks — are the financial institutions that global regulators have determined are too big to fail. As such, they operate under stricter capital standards and regulatory scrutiny than anybody else. Nevertheless, as Credit Suisse shows, they can still end up being worth a negative amount of money.

By the numbers: UBS is buying Credit Suisse for roughly negative $14 billion. It's paying $3.2 billion to Credit Suisse shareholders, but only because Swiss regulators are wiping out $17.2 billion of the bank's liabilities, leaving those bondholders with nothing.

Between the lines: In the normal world of mergers and acquisitions, that wouldn't be possible. Bondholders are senior to shareholders, meaning that they get paid out first, and only once they're paid out in full do shareholders get anything.

In the real world of rescuing a too-big-to-fail bank, however, such niceties can end up being sacrificed for the sake of managing to get a deal done.
The intrigue: UBS management and shareholders didn't particularly want to buy Credit Suisse, while Credit Suisse management and shareholders certainly didn't want their bank to be sold for peanuts. It's unlikely this deal would receive shareholder approval from either side — which is one reason why Swiss authorities changed the law to enable the deal.

The interests of international financial stability ended up overriding the interests of shareholders.
Where it stands: Swiss regulators forced the two banks together, threw Credit Suisse shareholders a $3.2 billion bone, and zeroed out a tranche of junior contingent convertible (CoCo) bonds that are supposed to convert into equity when a bank gets into trouble.

The big picture: Credit Suisse shareholders ended up losing about $17 billion in equity value over the past year. At that point, there wasn't another $17 billion left to lose — so the next tier up had to take a hit.

In the interests of expedience, it was easier to just zero out the CoCos and leave shareholders with $3.2 billion than it would have been to convert the CoCos to equity and then pay them out at pennies on the dollar. Just finding a conversion price would have been incredibly fraught.
The bottom line: Banks are a huge pile of assets offsetting another huge pile of liabilities. Shareholders only own the sliver between the two, which in the case of Credit Suisse was nonexistent. When a bank is failing, they generally have no say in what happens to it.

CoCo bondholders have more reason to feel aggrieved. But they were going to lose most of their money anyway — and besides, CoCos are supposed to behave like equity in a crisis.
In that sense, it shouldn't come as a complete surprise that they've been wiped out.