Swiss banks and bail col­lat­eral

The Pak Banker - - OPINION - Matt Levine

CREDIT Suisse Group AG posted the big­gest quar­terly loss in seven years as it wrote off good­will and set aside pro­vi­sions for lit­i­ga­tion," and there is a cer­tain sym­bol­ism in the fact that the 3.8 bil­lion Swiss francs of good­will im­pair­ment are "mainly re­lated to the ac­qui­si­tion of Don­ald­son, Lufkin & Jen­rette (DLJ) in 2000." In 2000, "in a move to­bet­ter com­pete against Wall Street's gi­ants," Credit Suisse bought DLJ for $11.5 bil­lion, giv­ing it "a lead­ing pres­ence in junk bonds and mer­chant bank­ing." Now it has lost in­ter­est in com­pet­ing against Wall Street's gi­ants, and "Chief Ex­ec­u­tive Of­fi­cer Tid­jane Thiam, 53, has pledged to fo­cus the se­cond-largest Swiss bank on wealth man­age­ment to tap growth across Asia with the se­cu­ri­ties divi­sions hurt by tougher cap­i­tal rules and a drop in rev­enues."

But the in­vest­ment bank is still there, still pay­ing peo­ple, still af­fected by "volatile mar­ket con­di­tions and widen­ing credit spreads on a num­ber of legacy po­si­tions in fixed in­come busi­ness." And still, for ac­count­ing pur­poses, car­ried at more or less its 2000-era, lead­ing­p­res­ence-in-junk-bonds-and-mer­chant-bank­ing val­u­a­tion. Un­til now. Now Credit Suisse has, cer­e­mo­ni­ously, in its fi­nan­cial state­ments, bid farewell to its in­vest­ment bank­ing am­bi­tions.

Also there were 355 mil­lion francs of re­struc­tur­ing costs and 821 mil­lion francs of lit­i­ga­tion items, and 4,000 jobs will be lost. In­vestors are not happy. I mean, they're fine with the scaled-back bank­ing am­bi­tions, but the losses are bad: "The num­bers are ter­ri­ble," said Di­eter Hein, an an­a­lyst at Al­phaValue based near Frank­furt who is re­view­ing his rec­om­men­da­tion on the shares. "The bank has started on its new strat­egy and is fi­nally mov­ing away from in­vest­ment bank­ing. In the mid- to long-term, it's right to fo­cus on growth in Asia, but what bad tim­ing given the cur­rent en­vi­ron­ment."

In other Euro­pean bank news, Deutsche Bank -- which re­cently wrote down its own good­will for the 1999 ac­qui­si­tion of Bankers Trust -- has seen its con­tin­gent con­vert­ible bonds plunge this year. Poor Martin Shkreli. The as­sets the for­mer drug ex­ec­u­tive pledged to make bail in a se­cu­ri­ties fraud case have fallen so far in value that he may need to put up more to stay out of jail, a pros­e­cu­tor said Wed­nes­day. Shkreli used an E*Trade Fi­nan­cial Corp. ac­count, once val­ued at $45 mil­lion, to se­cure his $5 mil­lion bail. Most of that ac­count was stock of KaloBios Phar­ma­ceu­ti­cals Inc., As­sis­tant U.S. At­tor­ney Win­ston Paes said dur­ing a court hear­ing.

The drug­maker, for­merly led by Shkreli, sought bank­ruptcy pro­tec­tion from cred­i­tors fol­low­ing his ar­rest in De­cem­ber. The shares plunged to $2.03 from a high of $45.82 in Novem­ber. On the one hand, it is a lit­tle rough that you should have to go to jail just be­cause your stocks fall. On the other hand, the story here is not quite that Shkreli put up $45 mil­lion worth of stock, and it lost value, and now it's worth less than $5 mil­lion. I mean, yes, when he put up the $45 mil­lion E*Trade ac­count as bail on Jan­uary 7, KaloBios had last traded at $23.59, mak­ing Shkreli's stake worth about $49 mil­lion. And, yes, it closed yes­ter­day at $2.00, mak­ing his stake worth about $4.2 mil­lion. But that $23.59 last trade was in mid-De­cem­ber: Af­ter that, KaloBios's stock was halted, and it filed for bank­ruptcy on De­cem­ber 30. By the time Shkreli put up his E*Trade ac­count as bail in Jan­uary, it ob­vi­ously was not worth $45 mil­lion, since it con­sisted mostly of stock in a bank­rupt com­pany whose stock price hadn't fallen only be­cause trad­ing had been halted. The events that re­duced the value of the ac­count hap­pened in De­cem­ber, not this week; it just took a while for the prices to catch up. I pointed this out at the time. It's a bit strange that it took pros­e­cu­tors this long to no­tice.

Also, when he put the ac­count up as bail, the New York Times re­ported that it was "the first pub­lic ac­count­ing of just how much money Mr. Shkreli - who last year be­came the fo­cal point of a na­tional de­bate over price goug­ing in the drug in­dus­try - has made over his brief ca­reer on Wall Street and in the phar­ma­ceu­ti­cal busi­ness," and that it "should put to rest spec­u­la­tion on how Mr. Shkreli was able to come up with $2 mil­lion to buy the only known copy of a re­cent al­bum by the rap group Wu-Tang Clan."

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