Business News

How scandal and mistrust ended Credit Suisse’s 166-year run

(Bloomberg) — Once one of the giants of the global financial system, Credit Suisse Group AG is no more.

Read the most from Bloomberg

After tense negotiations over the weekend, UBS Group AG agreed to buy Credit Suisse in an all-share deal for about $3.25 billion, less than the market value of troubled US lender First Republic Bank. The government-brokered sale marked the Swiss bank’s final fall from grace as a crisis of confidence threatens to ripple through global financial markets.

For 166 years, Credit Suisse helped position Switzerland as the linchpin of international finance and went toe-to-toe with Wall Street titans before scandals, legal issues and management turmoil undermined investor confidence. Did. While it was years to decay, the end came quickly.

Following the collapse of Silicon Valley Bank late last week, long-suffering Credit Suisse has quickly become a focal point of concern. Top shareholder Saudi National Bank told Bloomberg television on Wednesday it would “absolutely not” invest more in the lender, a rout was on.

A $54 billion financing backstop from the Swiss central bank – sealed on Thursday night to calm panic – failed to be the lifeline Credit Suisse had hoped for. With the country’s banking sector at risk, Swiss authorities pushed UBS to be a reluctant white knight.

The Swiss government “regrets that CS was not able to master its difficulties – it would have been the best solution,” Finance Minister Karin Keller-Sutter told a news conference in Bern on Sunday. “Unfortunately, the loss of confidence from markets and customers can no longer be stopped.”

Designated as one of the world’s 30 systemically important banks, Credit Suisse is one of the biggest victims of the financial turmoil triggered by central banks as they tighten monetary policy to rein in inflation. While concerns about further contagion will remain, the sale to UBS protects it from a disorderly collapse.

Before the global financial crisis – which Credit Suisse survived without a bailout, unlike many of its peers – the Swiss lender had more than $1 trillion in assets, but after years of decay, they dwindled to about $580 billion, which UBS About half of them were.

“Let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” said Colm Kelleher, chairman of UBS, who remained in the role after the transaction.

This blow could be significant for Switzerland. Home to 243 banking groups and 24 branches of foreign banks, the country’s stability and wealth are largely dependent on the finance industry. The combined assets of UBS and Credit Suisse are almost twice the size of Switzerland’s GDP, and newspapers from Sunday newspapers to broadsheets were filled with stories about the impending demise of a national icon.

Even as market concerns intensified, Credit Suisse insiders behaved as if they could still control the situation. Although the mood was gloomy, managers held town hall meetings to calm employee fears and investment advisors fielded calls from clients to discuss liquidity concerns, according to people with knowledge of the discussions.

But in his hometown of Zurich, skepticism and despair were growing. Outside its headquarters on the stately Paradeplatz, someone had written: “Goodbye to the next bank?” That questioning was later replaced by expressions of anger and disgust as reality slowly set in.

In its history, Credit Suisse financed the development of the Alpine Railroad and Silicon Valley. It bolstered the fortunes of Arab royals and Russian oligarchs and tipped Wall Street giants. But it struggled to control risk and make consistent money.

In recent years, the bank faced a revolving door of senior management, with each leadership change putting more pressure on performance. The stock has fallen more than 95% from its pre-financial crisis peak, and at Friday’s close the firm was valued at just 7.4 billion Swiss francs ($8 billion) – less than one-tenth the value of Goldman Sachs Group Inc.

“In Zurich, we’ve gotten a ring-side seat to this spectacular failure in slow motion,” said Matthew Ruesch, founder and managing partner of Broad Creek Capital, a family office. “We’ve seen the bank go from scam to scam for so long that it’s hard to remember them all at this point.”

burning bed

The seeds of Credit Suisse’s rise and eventual decline were sown in the summer of 1990, when then-Chief Executive Officer Rainer Gut saw an opportunity to inject the Swiss bank’s US partner, First Boston, with a modest capital injection and backstopping bad loans.

First Boston embraced the high-yield debt markets during the 1980s, lending billions of dollars for risky buy-and-sell transactions. The once-lucrative industry had imploded, and one of the most problematic deals was the $457 million in debt for the leveraged buyout of Ohio Mattress Company. The failed financing would go down in Wall Street infamy as the “burning bed”.

In the wake of the acquisition, Credit Suisse pursued the same types of risky businesses – such as leveraged finance and mortgage-bond trading – that led to the Burning Bed deal. Subsequent leaders of the Swiss lender pushed through several overhauls, eventually dropping the once-proud First Boston name in 2006.

The acquisition was part of an aggressive growth strategy including acquisitions of Swiss rivals, and complexity continued to grow. After succeeding Gut as CEO, Lucas Mühlmann bought the Winterthur Insurance Company in 1997. The Swiss bank then acquired Donaldson, Lufkin & Generate Inc. in 2000, but the deal proved to be a costly misstep for the New York-based investment bank. Because many of DLJ’s top-producing bankers moved to rivals in short order.

Winterthur was sold in 2006 by then-CEO Oswald Grubel, who briefly ran the bank with John Mack. Frequent management changes created strategic turmoil at the top, while putting pressure on the rank and file to generate returns.

Thomas Bell, a member of the bank’s board in the early 2000s, said, “Leadership, or the lack thereof, is at the root of CS’s demise.” “Nobody really knew what all the parts were, which led to poor risk management and the crisis.”

cut and paste

In 2015, a fraud perpetrated by a private banker who had no clients and no banking experience prior to joining Credit Suisse. After the market turmoil of 2008, a soft-spoken Frenchman – Patrice Lescaudron – began secretly funneling money into a wealthy client’s account, using the money to try to recoup other clients’ losses.

The deception was shockingly simple. According to Lescaudron’s own admission, he cut the signature out of a document, pasted it on business orders and photocopied them. There were red flags along the way, including verbal warnings and written warnings by supervisors twice in 2008, 2011 and 2013 for violations of compliance policies. And yet Credit Suisse failed to stop him. He was convicted of fraud in 2018 and took his own life in 2020.

As long as the money was flowing, an independent investigation commissioned by Swiss banking regulator FINMA found the bank contained bad behavior by Lescadron, though it stopped short of concluding that the bank knew about the fraud.

boardroom spying

In January 2019, a long-running feud between then-CEO Tidjane Thiam and Iqbal Khan, who ran wealth management and had set his sights on leading Credit Suisse, one day over dinner in a wealthy suburb on Lake Zurich I broke out in the open. ,

What began as an offhand remark by Khan about Thiam’s garden evolved into a serious corporate scandal, shattering the company’s reputation for discretion and exposing a culture in which personal vanity transcends ethical and legal boundaries. Went ahead

A few weeks after the dinner party, Khan was sidelined for promotion and then left in July. When he later accepted a job at UBS, the move sparked concern in Credit Suisse’s top ranks that he could poach key personnel. A private security firm was hired to monitor his movements, but were discovered by Khan in an incident that led to a physical altercation.

Although the bank rushed to dismiss the embarrassing incident, it was soon learned that it was not an isolated incident. Thiam was forced out in February 2020 with then-chairman Urs Rohner “due to a decline in trust, reputation and credibility among all of our stakeholders”.

As part of an investigation inspired by the Khan episode, the Swiss banking regulator in October 2021 uncovered five additional cases of oversight from 2016 to 2019. The toxic atmosphere at the top contributed to the damage caused by operational missteps.

trading debacles

In March 2021, Credit Suisse’s trading desk was notified that its largest client would not be able to pay more than $2 billion the next day. Arcegos Capital Management, the New York-based investment firm that manages the personal fortune of billionaire Bill Hwang, had entered into a settlement with other lenders after sizable bets went bad over the past two days, leaving not enough for Credit Suisse.

The news started an internal blame game, with officials in New York, London and Zurich accusing each other instead of focusing on damage control. Rivals were quick to sell off Arcegos’ collateral, and it took almost two weeks for Credit Suisse to come up with the initial match of its exposure: $4.7 billion. It would eventually rise to $5.5 billion, wiping out more than a year of gains and plunging the bank into an existential tailspin that led to a crisis of confidence last week.

The executives were already under fire for failing to protect the bank and wealthy customers from the collapse of a $10 billion wealth heist with now-disgraced financier Lex Greensill. The twin episodes shocked the finance world – but, looking back, they were decades in the making.

According to an independent report of the collapse by the law firm Paul, Weiss, Rifkind, Wharton & Garrison, the bank’s complicity, culture and controls were largely to blame for Archegos losses. Credit Suisse had a “reckless attitude to risk” and “failed at several junctures to take decisive and immediate action,” the report concluded.

The bank responded with a series of measures to correct the deficiencies and vowed to use the incident as a “turning point for its overall approach to risk management”.

But time has passed.

final plan

Last October, the new leadership duo of Chairman Axel Lehmann and Chief Executive Officer Ulrich Körner – who took over after the business debacle last year – called Credit Suisse’s return to its Swiss roots as the best way forward.

They took away jobs and raised $4 billion in new capital. Most importantly, he planned to carve out investment banking operations and eventually shut down the revived first Boston unit, ending a three-decade effort to compete on Wall Street.

Read more: UBS chairman vows to shrink Credit Suisse’s investment bank

“The new Credit Suisse will certainly be profitable by 2024,” Koerner said after presenting the restructuring plan. “We don’t want to over promise and under deliver, we want to do it the other way around.”

But the world did not stand still. Cheap money was gone, the global economy was in turmoil, and investor confidence was scarce – a combination that proved too much for a bank that never really learned its lesson from the global financial crisis.

“The banking sector is not like any other sector,” said John Plessard, an investment specialist at Mirabaud, based in Geneva. “Once trust is lost, you can’t rebuild it.”

– With assistance from Julian Ponthas, Allegra Catelli, Bastian Benrath, Bryce Baschuk, Claudia Madler, Natasha Doff, Philipp Lagercranser, Loukia Giftopoulou, Donal Griffin, Hugo Miller and Sagarika Jaisinghani.

(Adds comment from former Credit Suisse board member)

Read the most from Bloomberg Businessweek

©2023 Bloomberg L.P.


Back to top button