May you live in interesting times. Whoever coined the apocryphal saying, usually attributed incorrectly to China, clearly was not a banking regulator. History shows that economies tend to be more stable and crisis-resistant when the world of finance is kept intentionally dull. The crisis that has spread from US regional lenders to Credit Suisse Group AG and even sent tremors through Deutsche Bank AG is a sign of how far the world is from that nirvana of tedium. We are living in very interesting times indeed.
The Credit Suisse saga offers the best illustration, an extended soap opera that has featured a cocktail party bust-up between one chief executive officer and another top executive, a spying scandal and multibillion-dollar entanglements with billionaire Bill Hwang’s collapsed investment firm and disgraced financier Lex Greensill.
More exotic episodes include helping a Bulgarian wrestler to launder cocaine cash and involvement in a Mozambique fundraising for tuna fishing boats from which hundreds of millions of dollars were looted. The Zurich-based bank’s post-2008 history has been relentlessly interesting, in the most curse-laden sense of the word.
Illustration: Tania Chou
The demise of Credit Suisse, which was sold last week to UBS Group AG for about 3 percent of its peak US$96 billion market value, is a reminder not to neglect the human factor in assessing the health of companies.
Risk management is not simply a matter of financial ratios or the technical wording of bond contracts. Any investor who followed closely the flow of dirty linen spilling out into the open over the past two decades might have felt justified in staying well away from bank stocks.
There are only so many times that illicit behavior can be dismissed as the isolated actions of a rogue operator; only so many times that new management can be brought in to “fix” things, only for aspects of the same syndrome to repeat themselves. The chances are that familiarity bred contempt among some investors, and that the barrage of lapses started to appear like background static.
In fairness, there has been plenty of scandal to go around in the banking industry since the global financial crisis, from which Credit Suisse emerged in better shape than the rival that has now swallowed it.
UBS, unlike Credit Suisse, was bailed out by the Swiss government in 2008. It is right to acknowledge that the lender’s governance failings did not directly cause its downfall, even if they contributed to a years-long erosion of trust.
However, it is worth recalling how radically the landscape has changed. The irony of Credit Suisse’s nationality has escaped no one: Switzerland’s traditional reputation is as the home of rectitude, probity and discretion (secrecy) in banking.
“In the world of international finance, where all these foreign deposits give them considerable importance, Swiss bankers are known as sharp, hardheaded, but utterly conservative, completely honest and eminently respectable,” US historian T.R. Fehrenbach, who wrote a book about Swiss banks, wrote in the Atlantic magazine in 1965.
“They deal continually with and make loans to the most responsible corporations and national governments on Earth,” he wrote.
It is hard to square that image with the recent trajectory of Credit Suisse. The ultimate example of that departure from the sedate and dignified norms of Swiss banking, at least in terms of tabloid luridness, is the party held at the home of former chief executive officer Tidjane Thiam in early 2019. Iqbal Khan, then-wealth management head and neighbor in the upscale Lake Zurich neighborhood, made a disparaging remark to Thiam’s partner on the state of the garden, leading to an altercation between the two executives, Bloomberg News reported.
Their relationship deteriorated and Khan quit for UBS in July that year. That was not the end of the matter. Credit Suisse put him under surveillance on concern that he might poach its employees. Khan had a physical confrontation with unidentified men following him, and Zurich prosecutors subsequently launched criminal proceedings.
The CEO’s long-time top lieutenant lost his job, as did the bank’s head of security. Thiam said he did not order the spying and was exonerated, but was ousted in February 2020 anyway.
When the top guys are at each other’s throats, what does it say about the culture of the rest of the organization? Leadership sets the tone, so it is little surprise when other examples of ill discipline surface lower down in the ranks.
The autopsy into the March 2021 default of Hwang’s Archegos Capital Management, by which time Thomas Gottstein was CEO, was unsparing in its assessment of the failings that cost Credit Suisse US$5.5 billion.
The prime services business, which dealt with high-value clients such as hedge funds, had a “lackadaisical attitude toward risk and risk discipline,” law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP wrote in its report. Acute risks were identified and “systematically ignored.”
There was a cultural unwillingness to engage in challenging discussions or escalate matters. And so on. Credit Suisse later shut down its prime brokerage unit.
An alpha-male standoff between two of the most senior leaders is more reminiscent of the aggressive, free-wheeling investment banking culture of the US than the traditional image of the buttoned-down Swiss executive. Granted, Thiam is French-Ivorian, while Khan was born in Pakistan and moved to Switzerland aged 12.
The 166-year-old lender has had a variety of leaders over recent decades: Wall Street legend John Mack was CEO in the early 2000s, and fellow American Brady Dougan was succeeded by Thiam in 2015. Ulrich Koerner, who is German-Swiss, replaced Swiss-born Gottstein in August last year.
The impression is of two cultures that ultimately did not gel. That probably owes as much to institutional changes as anything else. The US abolished the depression-era law that separated retail and investment banking in 1999, helping to fuel a bout of risk-taking that culminated in the global financial crisis.
Switzerland already allowed so-called universal banks, and Credit Suisse took control of its US investment bank First Boston in 1990.
However, Wall Street’s pre-2008 party doubtless made the combination more combustible.
It is notable that, while some US banks got into trouble and required bailouts, investment bank specialists such as Morgan Stanley and Goldman Sachs Group Inc have since recovered to set market capitalizations that are far bigger than their pre-crisis peaks.
By contrast, the two remaining Swiss global banks — soon to be one — have a market value that is little more than one-third of what UBS alone was worth in 2007. Credit Suisse’s customers are understandably angry and casting about for who to blame.
The president of the Swiss banking regulator rejected the suggestion that it did not intervene early or aggressively enough to prevent the collapse, telling NZZ am Sonntag last weekend that Credit Suisse could face a probe and disciplinary action over how top managers ran the bank.
Holding nobody to account for running a near-US$100 billion company down to US$3 billion — a number that would be zero if bondholders had been treated fairly — would be in keeping with the post-2008 ethos, which saw senior bankers across the globe largely given a pass for their role, with the notable exception of Iceland, which jailed several banking executives.
After the crisis, there was a chorus of voices called for banking to be made boring again. For the nuts and bolts business of taking retail deposits, making loans and running payment systems to be separated from the jazzier, more innovative and far better remunerated business of investment banking and trading. It mostly did not happen. That looks like a missed opportunity amid what increasingly feels like a coda to the last crisis.
Although Credit Suisse was not brought down by a rogue trader making reckless or fraudulent bets (although the bank had those too), its abandonment of the time-honored Swiss virtue of conservatism looks like a Faustian bargain to investors in the bank’s equity or now-worthless additional tier 1 bonds.
It is a legacy that stretches back a long way.
“In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, and they had 500 years of democracy and peace. And what did that produce? The cuckoo clock,” said Orson Welles’ character in the 1949 noir classic The Third Man, delivering one of the more memorable, if inaccurate (the cuckoo clock was invented in Germany), appraisals of Swiss drabness.
After the carnage of the past few weeks, the boring old days never looked so good.
Matthew Brooker is a Bloomberg Opinion columnist covering business and infrastructure out of London. A former editor and bureau chief for Bloomberg News and deputy business editor for the South China Morning Post, he is a CFA charterholder. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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