Credit Suisse confusion on costly trades adds to CEO's woes
Credit Suisse Group Chief Executive Officer Tidjane Thiam dropped a bombshell on investors: Caught off guard by a buildup of illiquid trading positions, the CEO said the bank will probably post a second straight quarterly loss as it unwinds the trades and deepens cuts at that business. Thiam, less than two months after the bank disclosed losses on the positions that led to the biggest trading rev- enue drop among major banks, on Wednesday said that some of them were built unbeknownst to management in what he described as "unacceptable" practices. Yet within hours, he said the traders were operating within their limits, which may have been too high.
The revelations raise questions about what senior management should have known when the firm set out its strategy to transform the bank in October -- and when it later tapped investors for an additional 6 billion Swiss francs ($6.2 billion) to push through the overhaul, which Thiam said he's now retooling in part because of the surprise losses.
"I wouldn't fault the CEO for not completely understanding the ins and the outs, but the buck stops with the CEO," said Ronald Colombo, a law professor at Hofstra University and former counsel to Morgan Stanley. "The CEO has to have a team of trusted advisers who collectively understand what's going on."
Credit Suisse shares slid 3.3 percent to 13.98 Swiss francs, the secondworst performer in the 39-member Bloomberg Europe Banks and Financial Services Index. The stock has tumbled 35 percent so far this year, almost twice as much as the index.
Thiam, 53, already was struggling to restore investor confidence. In February, the company posted its biggest quarterly loss in seven years. Its shares were down 34 percent this year before this week's admission. The stock gained less than 1 percent on Wednesday as he pledged to make even deeper cost cuts, eliminating an additional 2,000 jobs this year. The global markets unit, which houses securities trading, will lose money in the first quarter as revenue drops as much as 45 percent from a year earlier, Credit Suisse said. Holdings of distressed debts, leveraged loans and securitized products have triggered more than $250 million of writedowns in the period, after about $500 million of losses in the fourth quarter.
On a conference call, analysts pressed Thiam on how the bank could be caught off guard by those assets -- and pushed him to specify which employees should be held accountable. Thiam said the scale of the positions "was a surprise to a number of people and was not a widely known fact" within the company. He declined to name responsible executives, broadly reassuring listeners that "there have been consequences," and that "we have dealt with it."
That may not be enough to quell outsiders' consternation. "Such deflective statements beg the question, where was senior management oversight?" said Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University. "Either trades were fraudulent and traders should be fired or senior management should take responsibility for allowing excessive risk-taking to happen. To simply say ' we were out of the loop' is not acceptable." For Huw van Steenis, an analyst in London with Morgan Stanley who asked Thiam about the losses during the call, questions about "execution and risk management will overhang plan B," according to a note to clients on Thursday.