Co-co bonds: the investment banker’s devilish new work of art

Luckily, you never really knew the difference between a Co-Co- bond and a cup of sweet chocolaty liquid. So when the Swiss authorities pulled the rug from under the holders of SwF16bn of Credit Suisse AT1 capital bonds, most of us found it difficult to work up much indignation on the part of the holders.

We are promised yet another lawyers’ benefit as those holders try and scrounge something from the wreckage, but the horrible truth is that they failed to understand the small print, even if they had read it.

These bonds are among the finest examples of the investment banker’s art. You want a high income without the risk of owning shares? These are for you. No, don’t worry about that stuff explaining that they are at the bottom of the credit heap. Look at all those bank reserves. It’ll never happen. Too big to fail, and all that.

The salesmen may not have described these bonds as a high return for a low risk, but that’s the implication, and the essential USP that underlies the forest of exotic instruments that the world’s banks issued like confetti during the lost decade of free money. The buyers treated them as bonds, while the regulators, told that they would be automatically converted into shares in a crisis, treated them as equity.

The issuing banks saw the opportunity to raise “equity” without diluting earnings per share, the metric on which many of the bonuses at the top depend. The buyers lapped them up. The result is a $275bn market in contingent convertibles – “Co-Cos”, as the breed is generically dubbed. A beefy return for a trivial risk. What could possibly go wrong?

There is no point, now, in trying to pin anything on the smooth-talking chaps who earned commission to get the money into these barely-understood investments in the first place. They long ago sailed their luxy yachts to their Bahamas hideaways. Those at the bank answering the phone today are a very different breed.

The Bank of England and others have rushed to condemn the shocking sight of the Swiss authorities paying something to the shareholders in Credit Suisse while wiping out the Co-cos. This is not supposed to happen – the shareholders should be completely wiped out first – and, all the other central bankers said, it definitely wouldn’t happen here.

Well, desperate times need desperate measures. If one of your only two national banks is facing meltdown, you may not be too fussed about who gets drenched as you put out the conflagration. Holders of these things issued by other banks may be reassured as they read the small print this weekend (perhaps for the first time) but us simple souls who ask what’s in it for the issuers might reflect that debt is debt and shares are shares, and ne’er the twain should meet.

Ferry rewarding

A year ago, Peter Hebblethwaite became the most hated man in Britain when P&O Ferries, the company he runs, summarily dismissed its 800 employees and replaced them with agency workers. There were shades of the “Wapping Flit” nearly 40 years ago when The Times left its overpaid print workers stranded and moved to east London, transforming the profitability of the group overnight.

Mr Hebblethwaite admitted that he had broken employment law. He had to endure today’s equivalent of the stocks, a public inquisition from a parliamentary committee, for his disgraceful treatment of all those sailors. Since then, the transformation of the ferries has been on an almost Wappingesque scale, and the grateful owners have now given Mr H a nice slice of £15.5m for his pains.

We do not know how the National Union of Rail, Maritime and Transport workers would have behaved had the law been followed, but we have since found out the hard way that its strike tactics can be pretty brutal. Looking at the union’s reputation at the time of sackings, one wag said that the sailors might have threatened to sink the ships to avoid being removed from their jobs, had P&O Ferries played by the rules.

An exaggeration, surely, but Oh, how much the today’s owners of P&O Cruises must wish they had kept the name to themselves and off the sides of those cross-channel ships.

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