“The wipeout of $17bn of Credit Suisse bonds has sparked panic among rich Asian investors who had loaded up on the risky bank debt. Under the terms of the UBS takeover of Credit Suisse, orchestrated by the Swiss government on Sunday, Credit Suisse’s additional tier 1 bonds were written down to zero while shareholders received $3.25bn.” reports the FT
The good news “Retail investors in Europe do not typically hold AT1s, and they are barred from doing so in jurisdictions including the UK.”
However, in Asia…“The selling included wealthy clients who owned the AT1s with leverage and were receiving margin calls, said two private bankers.”
The lesson. If you buy an investment and do not understand the risk, you are gambling (badly). And then you ‘borrow’ to buy the investment you do not understand. Delusional is the best way to describe it.
Every investor should be carrying out due diligence on the investments they hold. You don’t need to be a ‘rocket scientist’ to start asking questions that relate to risk. Get someone to explain the risk to you. If you do not understand what they are talking about…invest in something you do understand.
A banker at one of Singapore’s top private banks said many wealthy private investors were angry. “A lot of clients are in shock, they didn’t understand the writedown risk under certain scenarios. It is not mass selling but a fair few want to get out.”
Why were the bankers selling bonds to investors that did not understand the risks?
All too often, investors fail to ask enough pertinent questions about who they are taking advice from. So many firms have biases and it’s important to recognise and understand that bias. Thereafter, you can make decisions based on that knowledge. If you make decisions unaware of the bias, and if it goes wrong, you have to accept the consequences, however hard that may be.