top of page

The end of free market principles

Remember how people used to queue for Hello Kitty toys at McDonalds?

Consider this extreme: You are queueing in line for that limited edition item and suddenly realise that it'll be sold out by the time it reaches you.

The thought of walking away empty-handed drives you to think of other ways, including negotiating with the folks in front of you.

But everyone respects the unwritten rule of the queue - first come first served, get in line and wait for your turn.

Desperate and frantic, you decide to go bat-crap crazy and threaten to burn the whole store down if you don't get your toy, putting the entire queue and McDonalds store in jeopardy. Suddenly the store manager comes over to appease you, bringing you to the front of the queue, effectively guaranteeing a reward for your troubles.

Make enough noise, create enough damage and you'll get something.


For years, practitioners in the industry have been taught, have understood, and have accepted that equity holders stand behind debt holders in the queue to redeem cash flows of a business. These are the rules of the game relating to the priority of how cash in a business would be distributed, if and when assets are being liquidated.

It's a basic principle codified in financial markets theory.

But that rule seemed to have changed forever when Credit Suisse decided to write off a huge chunk of their AT1 debt last week and facilitate any residual payments to shareholders.

Source: Twitter
Senior debt letting common equity know who's in charge [Source: Twitter]

"Protectionism, geopolitical self-interest and state intervention, in other words, seem to have over-ruled free-market principles." - FT

By allowing the "free market principles" to take reign and go its natural course, the Swiss government runs the risk of embarrassing a certain influential Middle Eastern shareholder who recently invested in Credit Suisse, and in the process, taking the rap for the bank's current state of affairs.

Investors and onlookers would ask, "why bother even doing a capital raise in the first place only to write it all off within months?".

There would be a crisis of confidence in management, possibly wider overhanging doubts over stability in the region, including the country's position as a global wealth management hub. And then no one would put money in Switzerland anymore, a cost possibly too high for the government to bear.

When the reputation of your country is at stake, all concepts of equity and debt gets thrown out of the wi