Macaskill on markets: Thiam loses credit as Credit Suisse stumbles

Jon Macaskill
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A botched move to take the distressed credit out of Credit Suisse and an ‘acceleration’ of the strategic plan give the impression the bank’s new leader is making it up as he goes along.


Credit Suisse surprised investors with an unscheduled acceleration of a move to cut trading exposure and costs at its global markets division in late March. The restructuring came just over a month after Credit Suisse had announced far worse than expected fourth quarter 2015 results and made further refinements to a strategic overhaul that was originally announced in October.

The revelation in March of additional trading losses in distressed credit and leveraged finance books at the bank was an embarrassment for Tidjane Thiam, which was compounded when he admitted that he had not fully grasped the scale of the exposure run within the global markets group.

Given that Credit Suisse recently raised SFr6 billion ($6.2 billion) of capital, including a rights offering of SFr4.7 billion that completed in December, this raises a version of Richard Nixon’s Watergate question for Thiam: What didn’t he know, and when didn’t he know it?

Thiam’s version of events is that certain unnamed individuals in the global markets group at Credit Suisse were running higher than expected exposure to distressed credit as a weak fourth quarter for most investment banks turned into an exceptionally poor trading start to 2016.

"Clearly something went wrong. We’ve since then been looking at that very closely," Thiam told analysts on a call to announce further restructuring and trading losses. "Internally, the scale of those positions was not widely known," he added. "There have been consequences internally for a number of people, and I’ll stop at that."

This raised as many questions as it answered about risk-management techniques within both Credit Suisse and the broader industry.

Sceptical approach

Many banks with substantial investment banking operations trade at a wide discount to the theoretical value of their assets, which is a source of grievance to leading industry executives such as JPMorgan CEO Jamie Dimon.

The sceptical approach by investors becomes more understandable given that the regulatory overhaul that followed the 2008 credit crisis has failed to prevent frequent valuation and trading mishaps at big dealers.

The most recent misadventure at Credit Suisse is not one of the bigger trading upsets in terms of total losses – at least not so far. The two main areas of additional markdowns in the first quarter of 2016 were in distressed credit dealing and secondary trading of US collateralized loan obligations, or baskets of credit exposure.

The distressed credit book – which typically saddles a bank with unplanned equity exposure when high-yield bonds or loans default – was reduced from $2.9 billion to $2.1 billion, with a resulting loss of $99 million in the first quarter up to March 11. The secondary trading book of CLOs was reduced from $800 million to $300 million, at a loss of $64 million. Once related losses in securitized products and leveraged finance underwriting were factored in, Credit Suisse announced a $346 million first-quarter markdown to add to the $633 million of fourth quarter 2015 losses for these business lines.

The bank has accordingly suffered close to $1 billion in losses in the months since Thiam’s October strategy overhaul set a new framework for the bank that initially retained substantial securitized-product and high-yield credit trading exposure on the grounds that these businesses had produced substantial profits in the past.

That is a negligible hit compared to JPMorgan’s self-inflicted trading loss of $6.2 billion from the London Whale credit derivatives debacle of 2012.

It nevertheless undermines the credibility of the current Credit Suisse management team as it attempts to reform the bank.

The new plan in March for the global markets unit (or an acceleration of change, as Credit Suisse dubbed it), coming so soon after the October strategy overhaul and the February announcement of fourth-quarter trading losses, must have given some employees inside the bank the impression that the executive board is making up policy as it goes along. That is certainly how it looks to many outsiders.