What the heck happened to Credit Suisse?

Body:  So, if you can’t trust a Swiss banker, who CAN you trust?    This question has become some type of joke, appearing in any variety of action/comedy films of the 1980s and 90s.  The stereotype is of a very conservative business person, who keeps very quiet concerning the business of their clients.  So, is this stereotype justified?    I have never been to Switzerland, so I cannot say for sure.   But, with what just happened to Credit Suisse?   I’m not so sure the stereotype fits anymore.  You make the call.

OK, so what DID happen?

For many years, things were going well at Credit Suisse.  Credit Suisse (CS to the cool kids), was one of the few 800-lb gorillas on the Wall Street scene for many years.    Then, in an attempt to capture out-size dividends, they made some ill-advised investments, and received about $50 Billion loan from the Swiss National Bank, to help them address liquidity concerns.     They were scrambling for money, but as these withdrawals happened, the largest investors refused to pony up any more dough.    So, this was the need for the $50 Billion loan from the Swiss Nationqal Bank.   “This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs,” the bank said in a statement.  The bank also used some of this money to repurchase many of its own debts.    At the same time, the Bank went on a severe “rightsizing”  (read, “firing spree”) of the company, shedding over 9,000 jobs.  At the same time, management went on a disasterous policy change campaign where they demanded that employees be on site 3 days per week.   Some other employees chose to leave on their own.

In an effort to soften the blow to other Swiss financial firms, the Bank made a statement.  In it, they said the following:

“There are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market,” the statement continued.  The cynic that I am, we can already see why the Bank had to make this announcement.  Their shares dropped 24% overnight, and other large banks (e.g. Paribas, Societe Generale, Commerzbank et al.) dropped between 8-12%.   So, the question that must be asked is, what role, if any, did the failure of American banks have upon Swiss banks?  This remains unclear, and there is competent evidence on either side of this argument.   However, one expert on Swiss Banks said, “It’s unfortunate that the problems with some of the smaller U.S. banks in the last two or three weeks happened at the same time as this issue with Credit Suisse but the two are completely different and very largely unrelated,”  He went on to say that the financial body blows absorbed by Crediti Suisse started many years before the first of the American Banks began to fail.

The blows keep coming for Switzerland’s second biggest bank. On Tuesday, it acknowledged “material weakness” in its financial reporting and scrapped bonuses for top executives.  I read this line within the report, and I had to set my chair back up.  Let me explain.   First, CS is a bank and the largest issue they have to face is to keep the faith of their customers, so, finding them deficient in financial reporting is a HUGE black eye.  (Think of a Middle School Boxing Champ being accidentally scheduled to fight Tyson.  THAT  type of black eye.)  Second is a type of term of art within the auditing field.  When an audit firm finds a problem, it is a “reportable condition” and the company does something to mitigate it.   But,, when they find a “material weakness” it would be highly improbable that the company could institute a solution fast enough, and the prudent investor might change his or her investment decision on the basis of this material weakness.  Said another way, a reportable condition is an occasional migraine.   A material weakness is brain cancer.

Credit Suisse broke up.  Several of its components were legitimately profitable.   These went on to provide wonderful service to their clients.  The portions of CS that were bleeding red ink were purchased by UBS.  In addition to making less risky bets, UBS realized how important a hybrid work arrangement was to keeping the best people employed with them.

“In that sense I also see a prosperous future for the financial centre because we have hundreds of very well capitalized banks and very successful wealth management and asset management banks.”  Contrary to this expression of trust, it cannot be denied that number of banks has fallen from 356 in 2002 to 239 in 2021.  Over a similar period of time the industry has fired over 20% of its workforce.  Against this backdrop of decline, holding management accountable is nearly impossible in Switzerland (In the U.K. individual members of the Management Team can be held liable in these schemes, and might  face criminal prosecution.)

So, what lessons can we learn?

The Verdict

“If necessary, the SNB will provide CS with liquidity,”   The Swiss government said this of the future of Credit Suisse.  This statement struck me funny, given how proud the Swiss are of their banking industry.   But, stepping back a bit, this makes sense.  When Silvergate, Silicon Valley Bank and Signature went  down in the U.S., the FDIC went out of their way to express that all depositors would be made whole for their deposits.  This move was necessary to prevent others from running to other banks and withdrawing their deposits, and starting a bank run.   Apparently, the good people in Switzerland are little different  from the good people in the U.S.  I would guess that it hit me so hard because it strikes me as a little unfair that the government would be so willing to renumerate without apparent limit.  (They claim that taxpayers are not paying… How does THAT work?)  I think that the government is hoping that they can exercise “moral suasion” or use of an inexpensive form of jawbone control.    It seems to me risky that they are pinning so much hope to that technique.   Perhaps better regulation will evolve over time.   One can only hope.

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Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.