(Bloomberg Opinion) -- Credit Suisse Group AG’s recent history has been marked by a spying scandal, executive brawls and huge fines. But even by its low standards, 2021 is shaping up to be a horrible year. Within the space of a few weeks the Swiss bank has been caught on the wrong side of two spectacular financial-market implosions. An unfortunate coincidence? Unlikely. The firm’s ethos and business model are at the heart of the mishaps.
This is a systemically important lender that’s known for its capacious appetite for risk. Hence the Swiss bank forged deep ties to Lex Greensill’s murky invoice-financing business and is now struggling to return $10 billion of supply-chain funds to investors after Greensill Capital imploded this month.
Then last week it emerged that Credit Suisse was among half a dozen securities firms that backed the secretive, whale-like bets of Archegos Capital Management, now at the center of one of the largest ever margin calls.
Losses on the blowups could be material, the bank has said — as much as $3.5 billion on Archegos alone, according to some analyst estimates. That would erode capital and force the lender to scrap a planned stock buyback. On Monday its shares posted their biggest intraday decline since the 2008 financial crisis.
Dealing with the immediate financial hit might, however, be the easier task. Reshaping the business is a tougher prospect.
Credit Suisse, whose business relies increasingly on wealthy clients entrusting it with their savings, must tackle a glaring weakness: a culture for unbridled risk taking that emanates from the very top of the organization. And it will need to do so without destroying its investment banking franchise, which is bound to lose talented staff as it absorbs the heavy losses and refocuses on less hair-raising business. A year after taking the reins, Credit Suisse Chief Executive Officer Thomas Gottstein must wonder whether this is an impossible job.
Unlike many of its peers, Credit Suisse survived the financial crisis largely unscathed. And yet, the Swiss lender’s spirit of entrepreneurial adventure has long differentiated it from its bigger domestic rival UBS Group AG. Credit Suisse moved boldly into the U.S. securities business in the 1990s and 2000s, creating a number of power bases within the firm that management has failed to keep in check.
Gottstein’s predecessor, Tidjane Thiam, had a stated mission to de-risk the bank. That was hardly successful. While Credit Suisse did pare back its securities business and pivot to the steadier activity of managing money for the rich, the recent episodes suggest governance is far from where it needs to be.
Take the corporate spying scandal that led to Gottstein, a company veteran, replacing Thiam. It showed a deep failing by the board that it claimed to be oblivious about what its chief operating officer was up to (he was ousted after it emerged that the bank was snooping on Iqbal Khan, its former wealth management boss). An investigation by the Swiss regulator into the bank’s governance and controls is ongoing.
There have been plenty of other examples of Credit Suisse calamities, from reckless lending in wealth management to huge and questionable bets in prime broking, the business that serves hedge funds. Soon after Gottstein took over in 2020, the bank took a hit on defaulted loans to Luckin Coffee and its founder, once described by Thiam as a “dream client.” A writedown on a fund wiped out its asset-management profit for 2020 and now the bank finds itself at the center of Greensill’s and Archegos’s unraveling. In addition to the cost, both blowups will attract serious regulatory scrutiny.
No wonder Harris Associates, one of Credit Suisse’s largest shareholders, said departing Chairman Urs Rohner should forego the rest of his pay while still at the bank.
In fairness, Gottstein has taken tentative steps to tighten controls and compliance, combining units and concentrating risk oversight. The question is how much further can he go without curtailing Credit Suisse’s ability to compete?
Unsurprisingly, the firm is one of the biggest underwriters of this year’s craze for special purpose acquisition companies, which is now on the radar of U.S. regulators. Analysts say SPACs could generate 10% of Credit Suisse profit. Once the tide of monetary easing eventually recedes, how much risk will Credit Suisse be left holding?
Gottstein will soon have a new boss to please. Antonio Horta-Osorio, former CEO of Lloyds Banking Group Plc, takes over as chairman next month. A new management team may be the best chance Credit Suisse has to finally press the reset button and keep control of the bank’s destiny. Neither is a given.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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