Source The bank has been constantly haunted by setbacks: scandals involving cocaine, kickbacks and fraud, as well as an attack by Wall Street “hamsters”. The global financial services giant and symbol of the Swiss banking system, Credit Suisse, has been in the media headlines for the past year in connection with various scandals until speculation mounts that it could become the European equivalent of Lehman Brothers, which brought down the US markets in 2008. The bank has already had to announce a CHF 4bn (approximately $4bn) secondary issue and begin a major restructure to recover from its losses. And last week S&P downgraded Credit Suisse Group’s credit rating from BBB to BBB-. This is just one notch above junk securities. The group’s shares have fallen 56% since the start of the year and its capitalisation has fallen from $25bn to $10.8bn.
Credit Suisse’s capitalisation is now comparable to that of regional US banks like Fifth Third or Citizens Financial Group, notes The New York Times. That newspaper released a large investigation under the headline “How the paper of one of Switzerland’s oldest banks became a meme stock”. Internet users have indeed released one meme about the bank after another. In one of them, a cross on the Swiss flag has had one stick erased and the result is a minus on a red background, which clearly does not flatter the bank. While the Wall Street hamsters have been pushing the GameStop quotes in spite of the funds that are shorting them, the online crowd has a different stance on Credit Suisse: they are betting on the bank’s collapse.
Last week Credit Suisse announced details of a major restructuring of its business, talk of which has been going on since the summer. It is getting rid of distressed assets, laying off staff en masse and focusing on wealth management for wealthy clients. The story of how that came about is full of fascinating twists and turns.
In February 2020. Tijan Thiam lost his position as CEO of Credit Suisse in a grand scandal in which domestic squabbles were intertwined with corporate intrigue with illegal surveillance. It all started when Thiam’s house in Zurich stood next to the villa of his subordinate, Iqbal Khan, head of the Asset Management division. The latter demolished the old building and started the construction of a new one. Thiam was so fed up with the construction noise that he even went to complain about his subordinate to Urs Rohner, the chairman of Credit Suisse at the time. The response was scattered.
Thiam then thought of a way to retaliate. He planted trees on his property so that they blocked Khan’s view of Lake Zurich. Khan built his house with the expectation that he would look out over the water. Eventually Tiam and Han almost fought at a party and stopped talking to each other even at work. A short while later, Khan quit his job and moved to UBS, Credit Suisse’s main competitor. The story could have ended there. But someone at Credit Suisse’s management got suspicious that Khan could poach former subordinates and clients. The bank put him under surveillance and hired Investigo, an agency dedicated to detecting bank fraudsters and personal protection. According to Khan’s own account in the FT, the financier detected the “tail” himself, managed to photograph the surveillance and even tried to apprehend the would-be spy.
The police quickly discovered that the surveillance had been ordered by the bank. Credit Suisse’s chief operating officer, Pierre-Olivier Bouée, who was sacked from the bank after the story, took the blame. Thiam assured that he knew nothing about the spying passions surrounding a former subordinate. Then it emerged that the bank had also been following the former head of human resources after his dismissal (Bue again took the blame for this). Then the Swiss newspaper SonntagsZeitung wrote that Credit Suisse had also ordered surveillance on members of Greenpeace after its activists disrupted its 2017 AGM. And Swiss banking regulator FINMA revealed that Credit Suisse planned at least seven spying operations between 2016 and 2019 and carried out most of them. It emerged that Credit Suisse employees had forged invoices to hide what services were actually being paid for.
Under pressure from the board, Thiam had to resign, even though many Credit Suisse shareholders were standing up for him. Thiam took the reins in a difficult year for the bank in 2015, after Credit Suisse paid a $2.6bn fine and pleaded guilty to helping wealthy Americans evade taxes. For five years, Thiam worked to improve the bank’s business, minimising risk and focusing on the wealth management business, which helps wealthy clients multiply their fortunes. Just before his retirement in 2020. Thiam presented the bank’s best annual report for the past nine years to shareholders.
On the same February 2020 day that Thiam left the bank, another important event occurred that, according to The Wall Street Journal (WSJ), was one of the links in the chain that led to the bank’s big problems. Jason Varnish, 46, a father of three, was skiing in Colorado. While boarding a chairlift, he slipped. His jacket caught on the raised seat, crushed his neck… While the lift was stopped and Varnish was removed, he died of asphyxiation.
Varnish had been a managing director at Credit Suisse and was responsible for risk management. The bank hired his successor, Parshu Shah. He had been at Credit Suisse for two decades, but reporters could find no evidence that he had anything to do with risk management. On the contrary, he was involved in sales. This included actively trading instruments for the Archegos Capital Management fund, which in a year became world famous.
The new CEO of Credit Suisse, Thomas Gottstein, who replaced Thiam, said it was time to seize the opportunities for growth. According to the WSJ, his words were taken as a signal to capitalise on the market’s dizzying growth after the pandemic.
In March 2020, the first alarm bell sounded. Credit Suisse incurred a loss of around $200m due to a failed investment in hedge fund Malachite Capital. An internal audit concluded that, firstly, the bank had not understood Malachite Capital’s trading strategy, or rather failed to assess how the fund could be hit by volatility in the markets. And secondly, the business processes set up by Credit Suisse did not allow for efficient real-time assessment of the investment risks.
The size of the losses shocked some Credit Suisse executives, WSJ sources assured. But the necessary conclusions do not seem to have been drawn. In March 2021, the Archegos Capital Management fund mentioned above collapsed. Trading on high leverage, it miscalculated its forecasts and ended up getting caught in a margin call. He was leveraged by many banks: Goldman Sachs, Morgan Stanley, Credit Suisse, UBS, Nomura… Forbes estimates that the titans of Wall Street lost a total of more than $10bn on this, but Credit Suisse accounted for $5.5bn of this.
One of the reasons for this was control problems. Bank CEO Gottstein learned that Archegos was a big client of Credit Suisse just before it collapsed, WSJ sources assured. What’s more, as some of the shares Archegos was playing with had risen since the beginning of the year, the fund demanded that Credit Suisse return some of the collateral for these deals. And it received the money. Meanwhile, a number of Credit Suisse’s competitors acted in the exact opposite way: citing the risk that Archegos was increasing its investment in the shares of just a few companies, they demanded more collateral.
Also in March 2021, UK fintech start-up Greensill Capital went bankrupt. As luck would have it, Credit Suisse actively encouraged its clients to invest in it and assured them that the start-up’s bonds were low-risk securities. Not only did the bank lose its investment – some clients sued, and Reuters estimates that by early October this year the bank had compensated them for around $6.8bn.
After the March twists and turns, Credit Suisse fired some top managers and raised 1.8bn francs (about $2bn at the time) through convertible bonds.
From kickbacks to cocaine money
The string of bad news continued. In October 2021, Credit Suisse pleaded guilty to a series of irregularities in its lending to Mozambique. The case concerns 2013, when the bank lent a total of $1 billion to two state-owned companies, ProIndicus and Ematum. That is about 6 percent of the country’s GDP. This money was used to buy tuna fishing and coast guard vessels. About $200 million was found to have been used for kickbacks, and the bank was in possession of documents that clearly showed the difference between the money allocated and the cost of the boats purchased. In addition, Credit Suisse and the Mozambican authorities had concealed the loan from the IMF although they were obliged to inform the IMF as required by the terms of loans from the international fund. When the secret became clear, the IMF froze the next tranche. As a result, in 2018. Mozambique was forced to default. The US, UK and Swiss authorities investigated the story at length. Credit Suisse agreed to pay a total of $700m ($275m to US regulators, $200m to UK regulators and another $200m “forgave” Mozambique) to settle the claims.
A new scandal followed in January 2022. The chairman of Credit Suisse, Antonio Horta-Osorio, was forced to write his resignation. He was twice caught violating the quarantine rules imposed because of the coronavirus. He entered Switzerland and flew to the Iberian peninsula without waiting the prescribed 10 days, and during a visit to the UK he escaped the quarantine at the Wimbledon tournament.
In February, dozens of media outlets published an investigation into Credit Suisse’s clients – even sanctioned ones. It was based on the leaked data of 30,000 clients of the bank, which fell into the hands of journalists of the German newspaper Süddeutsche Zeitung. The media publications featured the names of post-Soviet businessman Aleksei Oleksin from Belarus, Alisher Usmanov’s sister, relatives of Islam Karimov and Nursultan Nazarbayev and many others. The journalists’ attention was also drawn to Stefan Cederholm, convicted of human trafficking, the former head of Siemens Nigeria, Eduard Seidel, accused of corruption, Serbian businessman Rodoliub Radulovic, suspected of fraud in the US. MEPs from the European People’s Party, the largest faction in the European Parliament, have demanded that Switzerland be put on the EU blacklist of countries that facilitate tax evasion.
In March Credit Suisse became $607 million poorer, a court in Bermuda ordered the bank to pay such compensation to former Georgian Prime Minister Bidzina Ivanishvili. Patrice Lescodron, Credit Suisse’s investment manager, lost his clients’ money during the 2008 financial crisis. Panicking, he secretly began covering the losses of some of his clients at the expense of others, mostly taking money from Ivanishvili’s accounts. For eight years, by forging statements and signatures, transferring money from one account to another, he concealed the losses. When it all came out, the bank announced it knew nothing about its employee’s scam. In 2018, Leskodron was sentenced to five years in prison for fraud. He got out a year later thanks to spending two years behind bars before trial. And in 2020, he took his own life. But because the bank did not compensate him for his losses, Ivanishvili had to go to court.
In June, Credit Suisse lost another high-profile case. The Swiss Federal Criminal Court found it guilty of failing to take measures against money laundering. At issue were the events of 2004-2008, when the money of Bulgarian “cocaine kingpin” Evelyn Banev, nicknamed Brando, was routed through the bank. Investigators claimed that the Zurich branch regularly received half a million-plus in cash from the drug trade and the bank accepted it. There were many interesting details in the case, but that is not the main point. The main thing was that for the first time a Swiss bank was brought before a criminal court in Switzerland. It is true that in December the Falcon Private Bank of Zurich was found guilty on similar charges and by the same court. But it cannot be called Swiss, notes Fortune: it was owned by the sovereign wealth fund of the emirate of Abu Dhabi.
In October this year, Credit Suisse agreed to pay €238m to settle another lawsuit. French prosecutors accused the bank of agitating wealthy French clients to transfer their assets to Switzerland between 2005 and 2012 in order to hide money from French tax authorities. The bankers held meetings with clients in hotels, restaurants – but never in the bank’s offices. 5,000 French people entrusted the bank with around 2 billion euros, depriving the home budget of more than 100 million euros in taxes.
And in the same month the bank agreed to pay $495m to settle a lawsuit for allegedly misleading customers about mortgage securities before the 2008 crisis. There are five other similar lawsuits pending in the US, but with much smaller claims.
On September 30, 2022, blogger Alasdair MacLeod, who poses as a stock analyst, wrote an alarming tweet about Credit Suisse’s stock decline from February 2021, writes the NYT. The next day, another blogger, Jim Lewis, posted a tweet, “The market says [Credit Suisse] is insolvent and probably bankrupt. Is 2008 coming up?” More bloggers and financial chat room patrons started sounding the alarm, calling the Swiss bank the next Lehman Brothers. Most interestingly, one of the “proofs” was a letter sent by Credit Suisse CEO Ulrich Kerner to employees on September 30. In it, the head of the bank assured that the institution was in good financial shape and urged not to confuse “the day-to-day dynamics of share prices” with good liquidity and solid capital. He also lambasted the media for making “many inaccurate statements” about the bank. Bloggers decided that if management was explaining to employees that all was well, it was a bad sign.
A bank with a long history
Credit Suisse is one of the largest financial groups in the world ($829 billion in assets, ranked 45 by S&P Global Market Intelligence) and second only to UBS ($1.1 trillion, ranked 34) in Switzerland. The bank was founded in 1856 and has been operating in Russia since 1993. At the end of 2021 it had 50,000 employees working in 150 offices in 50 countries, according to its website. The bank’s business is divided into four key areas: wealth management, investment bank, swiss bank and asset management.
At the end of March Credit Suisse began to reduce its presence in Russia, abandon new business projects and help employees to leave the country, wrote Bloomberg. According to the agency, the bank said it had 848 million francs ($906 million) and about 125 employees at risk in Russia because of the situation in Ukraine. Bank officials also said they would comply with all restrictions imposed by the EU, the UK, the US and Switzerland.
Although October 1 and 2 were holidays, Credit Suisse took the wave of panic online seriously. Bank managers called shareholders, trading partners and analysts, reassuring them that the bank was doing well. They worried that the online chatter would become a self-fulfilling prophecy, prompting lenders to close credit lines and customers to withdraw cash. The NYT notes that there was a rational basis for such fears. For example, trading volume in Credit Suisse shares by small investors almost doubled on Monday, Oct. 3, compared to Friday. Many were playing short.
The latest trigger was the Q3 report released on October 27. Credit Suisse reported its fourth quarterly loss in a row. And if analysts were expecting less than 600 million francs in net losses, in reality they exceeded 4 billion francs.
That is not to say that Credit Suisse has been idle. The bank CEO Gotstein lost his position in July amid continuing scandals and losses. UBS’s Ulrich Kerner, who has replaced him, announced a major strategic overhaul. He promised to provide more details by the end of October. Some things were known about beforehand. For example, the WSJ reported the sale of billion-dollar securitized products to a consortium of investors including Apollo Global Management and Pimco. Their offer was more attractive than that of a group led by Centerbridge Partners and Martello Re. And according to Bloomberg, the bank intends to get rid of its US asset management unit and should already receive the first bids from bidders.
Credit Suisse disclosed details of its restructuring plan along with its quarterly accounts. It is similar to what its competitors UBS and Deutsche Bank have undertaken, notes WSJ. Priority is being given to wealth management at the expense of investment banking. Wealth management at Credit Suisse shows a 9 per cent year-on-year increase in assets, Forbes notes. Taking Credit Suisse’s business as a whole, however, from January to early October it saw a net outflow of almost $13bn in assets against a net inflow of $30bn over the same period in 2021, adds the WSJ.
In an unexpected turnaround, the First Boston brand has been revived. Its history dates back to 1932, when it was founded as an investment arm of First National Bank of Boston and then spun off as a separate business. Credit Suisse bought the stake in 1978, grew it to a controlling interest in 1990, then took full control. At the same time the initials Credit Suisse were added to the old name of the bank and it became CS First Boston. And in 2006, the Swiss decided to drop the brand.
Consulting and investment banking will now be taken over by the revived CS First Boston. It will be run by Michael Klein, a former Citigroup banker who then became involved with SPAC. CS First Boston may eventually have co-owners, the WSJ notes. Credit Suisse CEO Kerner has announced that there is already a $500m funding commitment from an unnamed investor. And Saudi Arabia’s largest bank, Saudi National Bank, said it wouldn’t mind getting in on the business.
A pivot to the Middle East
Credit Suisse is looking to cut costs by 15% by 2025 and cut staff from 52,000 to 43,000. And 2,700 of those will be out of work by the end of this year. The bank predicts that the restructuring will cost 2.9bn francs. To patching the current holes and getting money for the changes, Credit Suisse will float an additional issue of shares for 4 billion francs. Two dozen of the leading banks helped work out the parameters for the issue, almost all of them except for some of the direct competitors, UBS and JPMorgan.
462 million shares will be sold at 3.82 francs, or about 94% of the bank’s weighted average share price on October 27 and 28. Of these, 307 million shares will be bought by Saudi National Bank, spending 1.17 billion francs. Thus it will control 9.9% of the share capital of Credit Suisse (11.6% of voting shares).
The current shareholders of Credit Suisse will have the right to purchase two shares for each of the seven they already hold, at a preferential price of 2.52 francs. The scheme is to be approved at an extraordinary general meeting of shareholders on November 23. If the plan does not get approval, Credit Suisse intends to print an additional 1.77 billion shares at a price of 2.27 francs apiece and receive the same 4 billion francs.
Qatar Holding is interested in increasing its stake, the Financial Times reports. It now holds around 5 percent of the voting shares in Credit Suisse. This could put up to a quarter of the Swiss bank in the hands of Middle Eastern investors, the newspaper believes.
On October 27, when the bank announced its restructuring plan and investors realised that their stake would be diluted, Credit Suisse quotations fell by around 19%, the WSJ wrote. This is the sharpest one-day drop since 1985. But the Saudis should be pleased. WSJ quotes Ammar al-Khudairy, chairman of Saudi National Bank. Saudi banks have not kept up with the growing demands of the kingdom’s customers, who until recently were content with a low-yielding investment fund or a simple deposit, he reasoned: “People want alternative assets, hedge funds, specialised products.”
Al-Khudairi expects to have access to the Swiss bank’s expertise and technology. Various financing instruments will also be useful for large-scale government development projects. Among them is Mohammed bin Salman, Crown Prince of Saudi Arabia’s favourite project, the Mirror Line, a building-city just 200 metres wide and 500 metres high, but 170 kilometres long, which would stretch from the Red Sea coast to the high valleys in the Tabuk region. Credit Suisse is no stranger to local realities. It began offering a range of products in the country in 2005, obtained a banking licence in 2019, and opened an office in Riyadh last year.
But will Credit Suisse survive, or has it been compared to Lehman Brothers for a reason? Analysts surveyed by Al Jazeera unanimously assert that collapse is unlikely. After 2008, regulators have been watching banks much more closely, and all the key indicators of Credit Suisse are at a good level. Of course the “too big to fail” argument is also mentioned. Credit Suisse has become a systemically important financial institution, one might say, for the whole world. It has 88 subsidiaries, where the bank owns more than 50%. Most of them are in Switzerland with 16 and in the US with 15. And the WSJ notes that Credit Suisse is not the first major bank to run into problems. Deutsche Bank last experienced something similar at the end of 2016. At the time there was also the question of its future. But after a painful restructuring and an $8.5bn bailout, Deutsche Bank was able to get back on its feet.