When I started working in global capital markets at CBA in the early 1980s, my first Eurobond issue was arranged by Credit Suisse First Boston (CSFB).

It was the bluest of bluechip names, among the most prestigious of investment banks. When we visited London, CSFB hosted dinner in a castle and brought out Lord and Lady Suchandsuch to regale guests with stories of royalty and courts in an extravagent meal finished with 50-year-old cognac. I was 25-years-old and rapidly learning how top society lived and worked.

Then CBA generously seconded me to Swiss Bank Corporation (SBC) to learn more about capital markets and my wife and I lived in Basle for six months. It was an incredible work environment of wood-panelled walls and floor-to-ceiling bookcases, lawyers sitting in dark offices dominated by massive partners' desks, and Bircher muesli each morning.

The Head of CBA Treasury, Campbell Ker, came over to Europe for a transaction roadshow, and we travelled around Switzerland and Luxembourg, six meetings a day, including an unforgettable flight on a small plane which banked around the snow-capped peak of the Matterhorn, so close I felt I could touch it. I still feel goosebumps thinking about it. We visited the offices of Swiss private banks hidden inside stark grey stone buildings, some of them looking like the archetypal Gnomes of Zurich. It was a time when the Swiss held the private wealth of the rich (and the Belgian dentists) protected by strict secrecy laws.

While I was there, SBC led CBA in the largest Australian dollar Eurobond issue ever, stuffing the bearer bonds (what tax?) into the portfolios of thousands of uber-wealthy clients and collecting generous fees along the way. It was civilised and efficient and Swiss-like, managing money as it passed from generation to generation among the elite.

Shortly after, I became Head of New Issues and it was the most wonderful job I ever had (looking back 40 years later). For someone who had only known motels and the back of a plane, the first- and business-class travel and luxury hotels soon became familiar. We raised billions of dollars of cheap, long-term debt all over the world, and Credit Suisse (CS) and Swiss Bank and UBS (UBS) competed for our business.

They were rivals for the funds management and investment banking needs of the world's borrowers and investors and it was unthinkable that they would all merge and remove the competition that banking needs.

But in 1998, SBC merged with UBS to create a powerhouse, the largest bank in Europe and the second-largest in the world with more funds under management than any global competitor. The merger was designed to cut costs and improve profits following a failure to adapt to rapidly-increasing competition.

And now, this greatest of banking nations with the world's once-most prestigious names looks like a banana republic. The Swiss Financial Market Supervisory Authority, FINMA, has cobbled together a deal to combine all these banks after a mad panic of a weekend.

Credit Suisse has been struggling for years but it still employs about 50,000 staff. The bankers who I worked with in musty and dusty offices in Basle must be shaking their heads in disbelief.

Prior to the GFC, when banking was a more reliable business and markets were riding high, many sensible investors would have preferred exposure to the great Credit Suisse than a technology company such as, say, Apple. In May 2007 when the first iPhone was released, Credit Suisse had a larger market value than Apple but US$90 billion of Swiss pride has been destroyed.

And now UBS has paid only US$3 billion for Credit Suisse, which was a sudden loss of value since last Friday when the market cap was around US$8 billion.

The bargaining strength of UBS left Swiss authorities desperate to pull together the deal before Monday's open, but the biggest shock in the terms was the complete write down in the value of US$17 billion of Credit Suisse hybrids. If FINMA wanted to settle the markets, this had the opposite impact, sending shockwaves through bond houses and other bank regulators as the Swiss spread the crisis to US$275 billion of global perpetual bonds.

FINMA overturned a general understanding of the heirarchy in bank capital structures. Hybrids or Contingent Convertibles (CoCos) - the Additional Tier (AT1) bonds - were supposedly another buffer above ordinary capital (shareholders) to absorb losses and protect senior bond holders. But critically, markets understood that shareholders ranked last in a crisis and AT1 holders were protected by ordinary equity.

FINMA will argue that AT1 bondholders did not properly read the offer documents. It was easier to assume the Swiss AT1s are the same as any bank preferred shares, but the Swiss bonds had a sting in the tale.

The documents say:

"Furthermore, any Write-down will be irrevocable and, upon the occurrence of a Write-down, Holders will not receive any shares or other participation rights in CSG [Credit Suisse Group] or be entitled to any other participation in the upside potential of any equity or debt securities issued by CSG or any other member of the Group ... The Write-down may occur even if existing preference shares, participation certificates and ordinary shares of CSG remain outstanding."

Plenty of bond managers are sweating this week. They need to explain how they misunderstood this, as the meaning seems clear.

It says the write-down in AT1 will occur even if ordinary shares of Credit Suisse remain outstanding. The bonds effectively rank behind common stock.

Courtesy of John Hempton, here is the Swiss bank capital structure, unlike anything I have seen in 40 years in the business.

As John says, it clearly shows 'common equity capital' (CET1) ranks above the 'low-trigger' AT1 capital instruments in the loss absorption waterfall.

This ability of the Swiss regulators to 'bail-in' the AT1 bonds came at the point of non-viability. Credit Suisse did not fail by becoming insolvent due to bad loans but it was facing a liquidity crisis following withdrawal of deposits.

As recently as 31 December 2022, its net tangible assets were US$45 billion. Once the Government stepped in to provide support (US$100 billion of liquidity, US$27 billion for write-downs, billions for losses, litigation and legals), the authorities argue they were required to mark down the hybrids to zero.

In contrast, shareholders will receive US$3.25 billion in equity in UBS. Class actions and furious legal teams representing bondholders are challenging the decision.

Regulators from other countries are assuring markets that the Swiss rules do not apply widely. For example, the Bank of England issued a clarification:

"AT1 instruments rank ahead of CET1 and behind T2 in the hierarchy. Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy."

Over the last couple of days, AT1 prices have rebounded as some level of confidence returns. For example, the ASX-listed VanEck Bentham Global Capital Securities Fund (ASX:GCAP) fell from $9 at the end of last week to a low of $7 on Tuesday and closed above $8 on Wednesday.

Investors considering the opportunity to buy into the turmoil don't know whether the financial system will face further problems. Liquidity levels at Credit Suisse looked high but no bank can withstand a massive loss of depositor support without government intervention. Banking is all about trust and this was a classic loss of confidence. Any investor jumping in should confine activity to the big Australian banks.

Why is Australia different? The first major point is the quality of our banks, which are making healthy profits, unlike Credit Suisse.

Our hybrids documentation is also materially different. Whereas the Swiss can write off the hybrids in an intervention, it is common here for the documentation to say:

"XYZ Bank must convert these notes (to shares) if the common equity capital ratio of the XYZ Bank as prescribed by APRA falls to or below 5.125% or if a non-viability event occurs."

While there are variations in the documentation for Australian issuers, there are no known circumstances where hybrids would be subordinated to common equity. In the absence of an extreme black swan event, the hybrid should be converted to shares in the bank in a crisis. And here are the latest capital ratios for Australian banks provided by the Reserve Bank and APRA, showing how much work has been done raising capital since the GFC.

One consequence of greater uncertainty is the impact on the Reserve Bank's plans to control inflation. The futures market for cash is now a full 1% lower at the end of the year than it was a few months ago. The 10-year bond rate is down to about 3.2%. Cash is currently 3.6%, futures is about 3.2% by August and not long ago it was at 4.2%. Then to 3% a year later, although this week's Reserve Bank Board minutes suggest optimism is a little early for embattled borrowers.

“Members observed that further tightening of monetary policy would likely be required to ensure that inflation returns to target and that the current period of high inflation is only temporary ... Members noted that the staff’s most recent forecasts were for inflation to return to the 2–3 per cent target only by mid-2025, and this was on the assumption that the cash rate is increased a little further”

Market rates fell due to the following sentence, and economists are increasingly on the side of a pause after 10 consecutive increases:

" ... members agreed to reconsider the case for a pause at the following meeting, recognising that pausing would allow additional time to reassess the outlook for the economy.”

The US Federal Reserve increased rates by 0.25% overnight (Wednesday) but signalled that the banking crisis might end the tightening cycle sooner than previously expected.