16 March 2023

Where did it all go wrong for Credit Suisse?


It is becoming increasingly clear we nearly had another Lehman moment.Regulators and central banks starred at the abyss and decided they did not want to go there,’ one source close to the events told me.

Credit Suisse really was on the verge of failing as potential losses on its bond portfolio would have sent its capital way below 8%, triggering contingent capital instruments ‘CoCos’, and left it scrabbling to raise new capital in an impossible market. This would have triggered a massive confidence collapse and systemic crisis across European finance, necessitating all-out bailouts and liquidity injections, raising social risk. French banks had massive derivative exposures on the name.

After pleas from Credit Suisse execs, the Swiss National Bank stepped in with a £45bn liquidity backstop which should relieve immediate pressure, but this fixes little in the long run. Once confidence in a bank is broken, it tends to stay that way.

It’s difficult to imagine how unlike anything in banking history, the long slow lingering demise of Credit Suisse has been. If it was a dog, we’d have cuddled it one final time, kissed it goodbye and shot it. Instead, we’ve got to watch the once towering titan of the global financial stage totter through senility, raging incoherently at the dying of the light.

The immediate crisis was brought about when its largest shareholder, a Saudi Bank, stated it would not be increasing its stake. That was seen as a notification of a collapse in confidence in the bank and its management.  Earlier it had reported material weaknesses in its financial reporting for the past two years. When Switzerland’s second largest bank lacks the basic competency to count its money that’s a problem.

Back when I was a young banker in the 1980s, Credit Suisse was a legend. Ossie Grubel was the banker’s banker, the trader’s trader who rose to ultimately became CEO. Credit Suisse First Boston made Goldman look second tier in investment banking.

What went wrong? A series of poor management choices, a failure to understand the unique risks it faces, a dereliction of clients, a failure to nurture its private banking, a loss of confidence in its investment banking division. The once successful Swiss Bank became an international bank with a Swiss name run by international banking technocrats with little understanding of its unique strength or culture.

For years it has being trying to reinvent itself. Multiple plans replaced by new plans, vaguely worded around ‘cultural transformation’, ‘risk management’ and ‘control processes’ to strengthen its Wealth Management, Private Banking and Swiss Banking division. Frankly when you’ve read a recovery plan in October, and a new one is announced in March, it’s difficult to find the enthusiasm to open it.

Over the past few years, if there has been a banking scandal or screw up, you can bet Credit Suisse’s name will be all over it. The bank lost the plot regarding managing and understanding its risk, encouraging bankers to chase anything on the basis it might work. It imposed a culture of profit first, and prudence last. From funding fraudulent tuna fishing boats in Mozambique, multiple drug money laundering failures, spying on its staff, backing financial scam artists like Greensill, or losing billions on hedge fund scam Archegos, you name it, Credit Suisse was there.

However, Credit Suisse had the wherewithal to withstand depositors demanding their cash back. There is no black hole at the core of its credit book set to consume the bank from within that we know of, yet. But my gut tells me Credit Suisse is history.  Confidence has gone. It will likely to be ‘supported’ – rather than outright rescued – by the Swiss Government. It’s too big as a systemically important financial institution in Europe and globally, and too critical to the Swiss economy.

The most likely outcome now is a distressed sale. Realistically, UBS is the only likely buyer. The Swiss will not want one of its ‘national champion’ banks going overseas. UBS is a better managed institution and big enough. It will be a brutal takeout and Geneva will be the loser. UBS (or any other bank) will see a purchase of Credit Suisse as a rescue and will look at HSBC’s £1 purchase of Silicon Valley Bank UK earlier this week as their pricing point.

A takeover feels inevitable. If it happens, then there is a chance, a slim one, even the Germans might take notice, and Europe’s overbanked market of lacklustre national champions might be resolved into a unified banking environment. Who am I kidding? That will never happen!

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Bill Blain is market strategist and head of alternative assets at Shard Capital.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.