(Bloomberg Opinion) -- In sharing his vision for the type of bank he intends to run, Credit Suisse Group AG’s Thomas Gottstein has been blunt. The giant Swiss lender mustn’t lose sight of its discipline over taking risks, and while mistakes will always happen, “we have no tolerance for unprofessional behavior,” the chief executive officer said recently. His promises are already being tested to the extreme.
How Credit Suisse manages the fallout from the implosion of Greensill Capital, a supply-chain finance firm with which it ran $10 billion of funds now in liquidation, matters enormously. Gottstein’s actions will determine how quickly his company recovers from its latest misadventure and will set the tone for his stewardship of the firm.
While not entirely of his own making, the Greensill debacle needs swift resolution to contain the reputational damage and keep clients on board. Gottstein was promoted to CEO in early 2020 with a mandate to restore order to a firm reeling from an internal spying scandal. The Greensill episode is just the latest in a string of mishaps at the Credit Suisse asset management unit that could cost it more than it has earned over many years.
Greensill’s riskiness has been on the bank’s radar for some time. According to an account by Bloomberg News, Credit Suisse executives were aware early on that a large portion of the funds that contained Greensill-sourced assets were tied to one client — a highly risky proposition in any circumstances. That client, Sanjeev Gupta, is now battling to win a reprieve over the debt his companies owe Greensill.
Credit Suisse was also aware of the Greensill-sourced assets’ reliance on a single insurer. Efforts to broaden the coverage never went anywhere. Yet in the end it was the loss of that insurance that forced the Swiss bank to freeze the funds before winding them down this month.
Gottstein’s most urgent task is minimizing the direct financial hit. On the hook for a $140 million loan to Greensill Capital, which has filed for administration in the U.K., Credit Suisse may also need to make good any losses for the funds’ investors. The Greensill pools have about $3.7 billion in cash, leaving about two-thirds of investor money tied up in securities whose value is hard to determine. Credit Suisse has also frozen four other funds that invested in the strategy.
Add in possible regulatory and litigation costs and the expenses could possibly run up to the hundreds of millions of dollars, if not billions. For an asset management unit that made about $500 million in 2019, the hit could be substantial. Bronte Capital Management Pty, a hedge fund, has placed what it describes as a “reasonable sized short” mainly against Credit Suisse because of losses it anticipates on the funds.
That Credit Suisse is conducting an internal probe and has suspended some key managers involved in the Greensill funds is encouraging. But it’s unlikely to be enough.
The bank takes pride in its entrepreneurial spirit, but investors will be asking if the asset management unit is really being run in the interest of shareholders. The Greensill blunder isn’t an isolated incident. Credit Suisse took a $450 million impairment on its stake in a U.S. hedge fund last year, as well as a smaller charge on a real-estate fund. The asset manager posted a loss in 2020.
A dearth of new money coming in would make matters worse. Investment consultants — who advise pension funds and endowments on which asset manager to use — will be nervous about Credit Suisse. In an industry in which scale matters, the bank’s $470 billion under management makes it a relative minnow, too. Shrinking the unit or exiting asset management entirely shouldn’t be ruled out.
Since taking the job, Gottstein, a Credit Suisse veteran, has recognized the need to overhaul the company’s risk oversight, which he has addressed by concentrating risk and compliance operations in Zurich. But he’s stopped short of bolder moves, while pledging to expand in riskier activities such as lending to wealthy clients — which also cost the company last year — and underwriting the listings of blank-check companies.
With a new chairman arriving soon, this is the ideal moment for Gottstein to put his stamp on Credit Suisse. Investor desperation for yield and trillions of dollars in central bank stimulus will continue to fuel an explosion of risk assets. But a venerable Swiss bank needs to sail these treacherous waters more serenely.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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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