Dougan undermined by underwhelming Credit Suisse


Abigail Hofman
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Brady Dougan is meant to be an excellent manager and people enjoy working for him.

But things seem to be going wrong at Switzerland’s other bank, Credit Suisse. This is odd because Credit Suisse was one of the winners of the financial crisis. It emerged with a strong balance sheet and a client-focused business model.

The ink was hardly dry on the press coverage concerning UBS’s restructuring when its Swiss rival rushed in, arms flailing, with its own reorganization. Instead of giving investors what they wanted – a slimmed-down investment bank – Credit Suisse offered up a complex hotchpotch that brings the phrase "dog’s breakfast" to mind.

The firm is splitting its global investment banking operations from those in Switzerland. The Swiss securities business is merged into a newly combined wealth management and private banking operation. At the private bank, Hans-Ulrich Meister will head the Swiss, European and Asian operations while Rob Shafir will run wealth management products in the Americas. Has Shafir, who joined the firm in 2007 from Lehman Brothers (where he was head of equities and a member of the executive management committee), done anything to justify this promotion? The asset management business, which he has been responsible for since 2008, has not performed particularly well.

The investment bank will be run by Eric Varvel and the former head of fixed income, Gaël de Boissard. "Rearranging the chairs on the Titanic," one source sniffed. That might be harsh, but these new positions do raise a question: if Credit Suisse’s strategy has been flawed, who is paying the price? All of these senior executives are part of the ancien regime. Contrast that with the new broom at UBS of Weber, Ermotti and Orcel.

For a while I have been underwhelmed by Varvel’s tenure at the top of Credit Suisse’s investment bank. This September, I wrote about his "ghost-like press presence" and the fact that if you Googled Varvel, no links to any press interviews came up on the first page although there were references to Varvel’s contributions to Mitt Romney’s election campaign and the fact that both men were Mormons. Varvel will now take up the role of CEO Asia-Pacific at the investment bank. He has good connections in the Asian region, where he was based for many years. But apparently he will continue to be based in the US. That is odd: he will have to travel 18 hours to fulfil his regional responsibilities. Does that make sense?

The fall guys, it seems, are Fawzi Kyriakos-Saad, CEO of EMEA and Osama Abbasi, CEO of Asia-Pacific, who are both leaving the bank. It would appear that the closer alignment of product and region in the new structure makes their roles redundant. This is a loss – such gentlemen would have had valuable relationships with regulators and regional clients. Will their successors have time to focus on clients as well as all the day-to-day headaches associated with product responsibility? Nevertheless, the new division into private bank and investment bank might facilitate a "Plan B". Plan B would be the eventual disposal of the investment bank.

This restructuring is bad for Credit Suisse shareholders because it shows a lack of understanding of where the market is going. We are in a low-growth world. Every initiative has to focus on cutting costs and greater efficiencies. Lean is in: flabby is decidedly out. There is not sufficient emphasis on reducing costs in this latest announcement despite Credit Suisse’s unpalatable cost/income ratio of 93.1% at the end of the third quarter of 2012.

The plan also undermines the credibility of Brady Dougan, the likeable and erudite Credit Suisse chief executive, whose reputation has already been dented by a malodorous run-in, earlier this year, with the Swiss National Bank about capital levels. An insider said: "You should give Dougan credit for the good things: reducing risk-weighted assets, raising capital over the summer, and he has taken measures to reduce costs." Nevertheless, the market was obviously as confused as I am and Credit Suisse’s shares were marked down by 2% on the day of the announcement.

I have a vision of Credit Suisse’s chairman, Urs Rohner, grasping the helm of the good ship CS with a feverish glint in his eye: “ I’m in charge,” he rasps theatrically
However a mole whispers that maybe the latest instalment in the Credit Suisse merry go-round is another case of ‘rampant chairmanitis’. Last month, I wrote about Mike O’Neill, the nonexecutive chairman of Citi, seizing the steering wheel of the Citi bus from chief executive Vikram Pandit.

I have a vision of Credit Suisse’s chairman, Urs Rohner, grasping the helm of the good ship CS with a feverish glint in his eye: "I’m in charge," he rasps theatrically. Rohner worked for a Swiss law firm, Lenz & Staehelin, before becoming chief executive of a German media company, ProSiebenSat.1 Media. In 2004, he became Credit Suisse’s general counsel. Rohner had a swift rise through the corridors of power at Credit Suisse and was named chairman of the group in 2011.

I am sceptical about lawyers managing big banks. I remember another lawyer, Chuck Prince, who presided over an unacceptable episode in Citi’s history at the peak of the last leverage bubble. Prince is most famous for his utterance during the summer of 2007, shortly before the financial world crumpled: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing." A year later, Citi’s share price plummeted by 60% and the bank collapsed into the arms of the US taxpayer.

The Abigail with attitude column’s verdict on the Credit Suisse restructuring is ‘C+ Disappointing.’ I think back to July 2010, when I met one of Credit Suisse’s board members. I told the board member that as far as I was concerned, Credit Suisse would underperform UBS over the next few years. The board member shot me a snooty look and said patronizingly: "Oh I don’t think so, Abigail."

All I can say is that I wish I had shorted the shares then. Since my meeting, Credit Suisse shares have dropped from SFr40 to today’s SFr21 (a 47% decline). In fact, with that share price performance I am surprised that Brady Dougan and the whole Credit Suisse board are still employed at the firm. Oh and did I mention that during the same period, UBS’s share price is up about 4% despite having incurred a $2.3 billion trading loss in the autumn of 2011?

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