Time, money and options are fast running out for Switzerland’s second largest lender, Credit Suisse.
After a string of hugely costly, self-inflicted crises (sound familiar?), Credit Suisse appears to be in the process of prising the mantle of Europe’s most troubled systemic lender from Deutsche Bank, which the German bank has held for most of the past decade. As the Wall Street Journal noted a few days ago, “Credit Suisse has taken pole position in a race to the bottom among big, but weak, European banks.”
The scandal-splattered bank has already reported losses of over $2 billion in the first half of this year, significantly under performing expectations as revenue at its investment bank has continued to plunge. That was after reporting an annual loss of $1.7 billion in 2021. Since the second quarter of 2021 CS’ asset base has slumped in value from $941 billion to $753 billion. Net revenues are also falling. Over the past nine quarters the bank has only managed to muster one quarter of actual year-on-year growth.
A Torrid March
It was in the Spring of 2021 when Credit Suisse’s current crisis began. And that crisis has revealed glaring flaws in its risk management processes.
As readers may recall, two of the bank’s major clients — the private hedge fund Archegos Capital and the Softbank-backed supply chain finance “disruptor” Greensill — collapsed in the same month (March 2021). By the end of April 2021, Credit Suisse had reported losses of $5.5 billion from its involvement with Archegos. Its losses from its financial menage á trois with Greensill and its primary backer, Softbank, are still far from clear, as the bank is trying to claw back almost $3 billion of unpaid funds for its clients (more on that later).
What is clear is that 2021 was a watershed moment for Credit Suisse. The bank’s then-CEO Thomas Gottstein called it “a very challenging” year. The irony is that the year before, when financial markets almost fell off a pandemic-induced cliff, the bank managed to generate a net profit of $2.84 billion while many of its peers posted record losses. Credit Suisse was even lauded for its risk management in the weeks leading up to the lockdowns, picking up Risk.net’s Credit Derivative House of the Year award in February 2021:
Within weeks, the US credit markets were in meltdown. The Covid-19 pandemic crippled corporate earnings and everyone wanted credit protection. CDS indexes jumped to their highest levels on record, according to Bloomberg data.
Credit Suisse was a step ahead of the tide. The moves it made in February paid off in a big way. The put options on LQD returned 30 times the initial premium outlay. The desk was also actively sourcing front-end single-name CDS protection from issuers of synthetic collateralised debt obligations in the second half of 2019 and early 2020.
All of this meant it was in a good position to offer liquidity when credit spreads blew out in March. “When volatility escalated, we were able to help clients with what they needed to do without needing to protect ourselves,” says David Goldenberg, Credit Suisse’s head of global index and options, and head of US credit derivatives.
A month after receiving that award Credit Suisse’s reputation for risk management was in tatters. As banks offering prime brokerage services to Archegos Capital began liquidating billions of dollars’ worth of various stocks on which Archegos owned options after the hedge fund had failed to meet a margin call, CS was slow to react. As the Wall Street Journal reported at the time, Goldman Sachs and Morgan Stanley were able to minimize their losses relating to Archegos by responsing more quickly than Credit Suisse and Nomura Holdings. Even Deutsche Bank was able to close its substantial positions rapidly and avoid any losses.
A Long-Term Trend
But like most financial flag carriers in Europe, Credit Suisse’s problems date back to the massive build up of private debt during the pre-crisis years. Many banks in the Euro Area never got over the resulting Global Financial Crisis and the European sovereign debt crisis that followed shortly after. In Switzerland, it was UBS, the country’s largest lender, that landed itself in serious trouble in 2008 through its exposure to US mortgage securities. UBS was bailed out with public money while Credit Suisse was able to raise capital from the private sector.
But ever since then, Credit Suisse’s stock has been in a death spiral, having lost 95% of its value since 2007…
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Nick Corbishley 