LondonFinance1
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Management Consulting
You will have seen the news that Credit Suisse was merged (bailed out/rescued) https://www.independent.co.uk/news/business/ubs-takeover-credit-suisse-b2304918.html by its Swiss rival UBS over the weekend. This is the second bailout in as many weeks after SVB https://www.canarywharfian.co.uk/threads/silicon-valley-bank-–-is-the-fed-bailing-out-crypto.736/ - is it 2008 all over again?
Not really – first, there were no business ties between SVB and CS to speak of. Both followed wrong (but different) strategies and eventually run out of equity/core capital – not pleasant, but has happened in banking for centuries. CS’s biggest investor Saudi National Bank refused to provide the bank with fresh equity – not exactly a vote of confidence and the end of a long decline. The proposed raisedwould have also diluted massively existing shareholding by almost doubling the number of outstanding shares. On Friday last week, the bank’s stock had fallen by more than 95% from its pre-financial crisis peak to a valuation of a mere 7.4bn Swiss francs (USD8bn) - less than a tenth of the value of Goldman Sachs.
Switzerland always was a bit of an oddity as a tiny country with the a population smaller than London was home to two banks with global ambitions. While UBS was focussing more on asset and wealth management (less risky if you stay on the right side of the law) while Credit Suisse was more into higher risk, but also potentially higher reward investment banking. The bank has tried to shift towards asset management in the previous years, but this was easier said than done: In 2019, a fight between then-CEO Tidjane Thiam and chairman Iqbal Khan evolved into a corporate scandal, shattering Credit Suisse’s reputation for discretion and exposing a culture in which personal vanities trumped ethical and legal limits. As part of an investigation prompted by that episode, the Swiss banking regulator in October 2021 uncovered five additional cases that breached banking surveillance rules from 2016 to 2019. The next CS chairman Antonio Horta-Osorio was more occupied with breaking Covid rules (travelling to and from his residence) and then dealing with the fall-out, so lacked time and focus to force through a much-needed pivot and was finally forced out.
In 2021, Credit Suisse took a $5.5bn loss after its biggest client, Bill Hwang's hedge fund Archegos Capital Management, imploded. That sent the bank into a tailspin from which it never recovered. The new leadership duo of Chairman Axel Lehmann and CEO Ulrich Koerner took charge last year, tried a return to the banks’s Swiss roots, but ultimately run out of time.
The plan was to spin off a part of the investment banking – tricky if this is a large part of the bank and has a long history of scandals, going back some 30 years when Credit Suisse bailed out First Boston after the infamous “burning bed” deal with Ohio Mattress. First Boston had a history of risky junk-bond deals which the newly minted Credit Suisse First Boston kept alive. In recent years, CS was also involved in the collapse of the lender Greensill Capital (yes, that one) and the US-based hedge fund Archegos Capital.
A resolution/winding the bank down was not really an option as that would have risked contagion, not only in Switzerland, but also beyond its (banking) borders. Probably a good deal of national pride played a role as well. CS is not the only Swiss bank with interesting top management, just look at Raifeissen’s former CEO charging ahem... adult entertainment to the company credit card https://news.sky.com/story/pierin-v...fter-putting-strip-clubs-on-expenses-12589381 but CS might be a cut above the rest.
You might struggle to find the word “bail-out” in the announcements as the Swiss general public still has not so favourable memories of the 2008 bail-out of UBS, but besides a forced merger, there was also liquidity from the public purse and further guarantees by the Swiss central bank. The gouvernment played a central part in the deal over last weekend, raising eyebrows on e.g. competition regulation, overriding existing legislation and not allowing shareholders to vote on the proposed deal – not exactly the picture you would have in mind when thinking about Swiss banking regulation.
To sell the deal to the Swiss taxpayers, losses on CS’s Additional Tier 1 (AT1 bonds) of SFR 16bn were part of the deal. While these are designed to take losses when institutions run into trouble, usually they are not triggered if shareholders receive money as part of a takeover as bondholders would take precedence over shareholders in case of an insolvency. It might also have been to please international shareholders after denying them a vote on either side of the transaction, but is also a measure out of the usual. However, AT1 are not a purely Swiss phenomenon, so things could get interesting for other banks. With the example set, they will become a lot less interesting as an asset class and might make it more difficult for banks to raise funds through these instruments.
What to make out of this – isolated incidents or one more step towards a global banking crisis? CS definitely had a colourful history and a string of challenges and fines. It would have probably been able to go on for a while if interest rates had not risen, but the question is for how long. So, once again those much-loved regulators will need to do a better job, even if it means bringing down a national icon and making banking more boring and less fun. Banks will need to go through their books to see if (and how many) high-risk assets they have on their books – that might reduce access to finance for companies requiring risky finance (e.g. if they are in economic trouble). I do not see how all this can translate into a global meltdown, though – after all, SVB and now Credit Suisse were bailed out in all but name, avoiding another Lehman moment (or even two). As there are shoots of hope on inflation slowing down and thus interest rates not being hiked further (and potentially even falling towards the end of the year), the pressure on certain asset classes will ease.
Not really – first, there were no business ties between SVB and CS to speak of. Both followed wrong (but different) strategies and eventually run out of equity/core capital – not pleasant, but has happened in banking for centuries. CS’s biggest investor Saudi National Bank refused to provide the bank with fresh equity – not exactly a vote of confidence and the end of a long decline. The proposed raisedwould have also diluted massively existing shareholding by almost doubling the number of outstanding shares. On Friday last week, the bank’s stock had fallen by more than 95% from its pre-financial crisis peak to a valuation of a mere 7.4bn Swiss francs (USD8bn) - less than a tenth of the value of Goldman Sachs.
Switzerland always was a bit of an oddity as a tiny country with the a population smaller than London was home to two banks with global ambitions. While UBS was focussing more on asset and wealth management (less risky if you stay on the right side of the law) while Credit Suisse was more into higher risk, but also potentially higher reward investment banking. The bank has tried to shift towards asset management in the previous years, but this was easier said than done: In 2019, a fight between then-CEO Tidjane Thiam and chairman Iqbal Khan evolved into a corporate scandal, shattering Credit Suisse’s reputation for discretion and exposing a culture in which personal vanities trumped ethical and legal limits. As part of an investigation prompted by that episode, the Swiss banking regulator in October 2021 uncovered five additional cases that breached banking surveillance rules from 2016 to 2019. The next CS chairman Antonio Horta-Osorio was more occupied with breaking Covid rules (travelling to and from his residence) and then dealing with the fall-out, so lacked time and focus to force through a much-needed pivot and was finally forced out.
In 2021, Credit Suisse took a $5.5bn loss after its biggest client, Bill Hwang's hedge fund Archegos Capital Management, imploded. That sent the bank into a tailspin from which it never recovered. The new leadership duo of Chairman Axel Lehmann and CEO Ulrich Koerner took charge last year, tried a return to the banks’s Swiss roots, but ultimately run out of time.
The plan was to spin off a part of the investment banking – tricky if this is a large part of the bank and has a long history of scandals, going back some 30 years when Credit Suisse bailed out First Boston after the infamous “burning bed” deal with Ohio Mattress. First Boston had a history of risky junk-bond deals which the newly minted Credit Suisse First Boston kept alive. In recent years, CS was also involved in the collapse of the lender Greensill Capital (yes, that one) and the US-based hedge fund Archegos Capital.
A resolution/winding the bank down was not really an option as that would have risked contagion, not only in Switzerland, but also beyond its (banking) borders. Probably a good deal of national pride played a role as well. CS is not the only Swiss bank with interesting top management, just look at Raifeissen’s former CEO charging ahem... adult entertainment to the company credit card https://news.sky.com/story/pierin-v...fter-putting-strip-clubs-on-expenses-12589381 but CS might be a cut above the rest.
You might struggle to find the word “bail-out” in the announcements as the Swiss general public still has not so favourable memories of the 2008 bail-out of UBS, but besides a forced merger, there was also liquidity from the public purse and further guarantees by the Swiss central bank. The gouvernment played a central part in the deal over last weekend, raising eyebrows on e.g. competition regulation, overriding existing legislation and not allowing shareholders to vote on the proposed deal – not exactly the picture you would have in mind when thinking about Swiss banking regulation.
To sell the deal to the Swiss taxpayers, losses on CS’s Additional Tier 1 (AT1 bonds) of SFR 16bn were part of the deal. While these are designed to take losses when institutions run into trouble, usually they are not triggered if shareholders receive money as part of a takeover as bondholders would take precedence over shareholders in case of an insolvency. It might also have been to please international shareholders after denying them a vote on either side of the transaction, but is also a measure out of the usual. However, AT1 are not a purely Swiss phenomenon, so things could get interesting for other banks. With the example set, they will become a lot less interesting as an asset class and might make it more difficult for banks to raise funds through these instruments.
What to make out of this – isolated incidents or one more step towards a global banking crisis? CS definitely had a colourful history and a string of challenges and fines. It would have probably been able to go on for a while if interest rates had not risen, but the question is for how long. So, once again those much-loved regulators will need to do a better job, even if it means bringing down a national icon and making banking more boring and less fun. Banks will need to go through their books to see if (and how many) high-risk assets they have on their books – that might reduce access to finance for companies requiring risky finance (e.g. if they are in economic trouble). I do not see how all this can translate into a global meltdown, though – after all, SVB and now Credit Suisse were bailed out in all but name, avoiding another Lehman moment (or even two). As there are shoots of hope on inflation slowing down and thus interest rates not being hiked further (and potentially even falling towards the end of the year), the pressure on certain asset classes will ease.