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Casino Suisse: Credit Suisse’s Implosion - Myles Kelly

Founded in Switzerland in 1865, Credit Suisse situates itself as one of the nine global ‘Bulge Bracket’ investment banks providing services such as the trading of products such as stocks and bonds on behalf of their clients and advising companies on raising money on stock markets via new share issuance. As well as being a premier investment bank, Credit Suisse markets itself as a global wealth manager and financial services firm; with its reputation, it is perhaps no surprise that the firm was able to post a CHF 3.4 billion net income in 2019, a 69% jump from 2018 levels. However, despite the rosy outward appearance the firm has been rocked by several significant financial scandals in recent years indicative of wider underlying problems with the most recent demanding that Credit Suisse raise an emergency $1.9 bn from shareholders to shore up its balance sheet. This article will contextualise the recent challenges which the firm has experienced, before then going to explain the impact of the two most recent scandals, Greensill Capital and Archegos Capital. Finally, it will explore Credit Suisse’s future outlook, ultimately concluding that there is a real possibility of reform with the introduction of its new chairman António Horta-Osório.

Notable Recent Scandals

Credit Suisse’s share price has been on a slow decline since 2010 such that it now trades at around 10 CHF relative to the 55 CHF traded then. Whilst this steady decline is the result of many contributing factors stemming from 2010, I believe it best to tackle two of the most recent which contemporaneously hindered the credibility of the firm in 2019.

Corporate Spying Debacle

In 2019 it was admitted by Credit Suisse it had hired private detectives to track two of its executives thereby portraying a toxic work culture within the firm. The employees that were tracked were former head of human resources Peter Goerke and the former head of the bank’s wealth management division Iqbal Khan; this tracking however was not a subtle affair given that private detectives followed Khan through the streets of Zurich, resulting in an erratic car chase and eventual confrontation. Whilst Credit Suisse in an internal review sought to blame former chief operating officer Pierre Olivier Bouée for both incidents and reached the conclusion that neither its chief executive Tidjane Thiam or other members of the board or executive team had any knowledge that Goerke was followed “until media reported it”, this was unsuccessful in preventing Thiam being forced out. The wider impact of this corporate espionage is that Switzerland’s financial regulator, Finma, opened enforcement proceedings against the firm ‘in which it will pursue indications of violations of supervisory law in the context of the bank’s observation and security activities and in particular the question of how these activities were documented and controlled’. Although the findings of this report are yet to be published and despite assurances that its business has not been affected by the scandal, there will almost certainly be irreparable scarring to its reputation.

Entanglement in Wire Card Fraud

Prior to the unravelling of fintech company Wirecard, Credit Suisse advised Softbank in setting up a $1bn lifeline of convertible bonds to the German payments company. Credit Suisse then went on to repackage those bonds and resell them to third party investors. A convertible bond is a hybrid security that yields interest payments but can be converted into a predetermined number of shares in the target company, and this was marketed as a move that could net the Japanese conglomerate a big profit while taking little risk. This profit however did not materialise after revelations that forged balance confirmations had been presented to Wirecard’s auditor EY, leaving a €1.9bn hole in its balance sheet and causing a fatal crash in its share price. Whilst the financial hit to Credit Suisse was limited given that it did not hold significant exposure to Wirecard bonds, the event again raised concern as to why Credit Suisse did not perform a more rigorous check on the underlying company whose bonds it packaged up.

The Current Crises

Credit Suisse has now again been forced into the spotlight via the twin blows of Greensill Capital and Archegos Capital which has cumulated in a $275 m loss in the first quarter of 2021, its biggest quarterly loss in more than a decade.

Greensill Capital

Credit Suisse froze $10 bn of funds linked to Greensill Capital at the start of March 2021after an insurance contract underwriting Greensill’s invoice-backed loans lapsed and the emergence of doubts of the valuation of some of Greensill’s assets. Greensill Capital was a supply chain finance group, founded by Lex Greensill, whose business model involved an agreement to pay the bills a company owed to its suppliers with the trade-off being for the suppliers that they get paid quicker, albeit at a slightly lower figure than they were owed. Greensill Capital would then collect the full amount of the invoice from the company that owed the original debt. Greensill arranged this type of funding for companies by packaging these supplier bills up into bond-like investments for Credit Suisse and these were sold by Credit Suisse to institutional investors such as pension funds, insurers and corporate treasuries. It is rumoured that Credit Suisse’s clients could lose up to $3bn from Greensill’s collapse which has prompted a class action against the lender spearheaded by law firm Boies Schiller Flexner. Any lawsuits will probably be centred around potential misrepresentation given that clients had been persuaded to invest in its collection of supply chain finance funds, backed by the collapsed Greensill Capital, that was marketed as ultra-safe with “limited credit risk given multiple layers of protection”. Once more Credit Suisse credit has exposed itself to expensive litigation and damaged client relationships which may take years to repair.

Archegos Capital Fallout

Credit Suisse’s New York prime brokerage unit, which offers specialised services to hedge funds, was engulfed in crisis when one of its clients, Archegos, imploded causing a $5.4 billion loss to the bank. The bank had lent billions to the family office of Bill Hwang who used the money to speculate on volatile stocks in a venture that only generated a mere $17.5 m return from the relationship for the bank. How this high-risk relationship itself came about is alarming given that Hwang was not a private banking client of the group, suggesting there was little incentive to pursue his prime brokerage business. Equally worrying was the low level of fees demanded by Credit Suisse in return for this high-risk exposure; it only demanded a margin of only 10 per cent for the equity swaps it traded with Archegos and allowed the family office 10-times leverage on some transactions, double the leverage offered by fellow prime broker Goldman Sachs which only took minimal losses when unwinding its positions.

Future Outlook

It is more than apparent that there is a deficient risk culture at Credit Suisse and both short and long term strategies have been employed to rectify this. In the short term, there has been the removal of several high profile executives such as Lara Warner, Credit Suisse’s chief risk and compliance officer, and Brian Chin, head of Credit Suisse’s investment bank, alongside the bank’s senior executives having their bonuses for the year withdrawn. The problems at Credit Suisse however are more endemic than this and into this maelstrom comes António Horta-Osório as Credit Suisse’s new chairman who is hoped to bring a long-term renewal to the firm’s fortunes. Horta-Osório described the problems as more serious than anything he had experienced in his career, which includes marshalling Lloyds Banking Group in the UK after its government bailout, and has already commissioned an urgent review of the bank’s risk management, strategy and culture. This is a crisis that Horta-Osório must not waste at a time when there exist real doubts about the bank’s future existence and whether it will be broken up or survive in a European banking market that is under pressure to consolidate.

In conclusion, Credit Suisse’s clouded history illustrates that it has created its own ‘bad luck’ rather than being a firm of bad fortunes. This aside, with the introduction of Antonio Horta Osoria, there is the perfect opportunity to reform the bank and ensure its long-term survival but only time will tell whether real change will materialise.

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