The Washington Post
Credit Suisse can’t be fixed. Break it up — now.
Aformer top executive of Credit Suisse once told me that only a week or so after joining the Swiss bank, they realized that the bank’s culture was so broken it couldn’t be fixed. But the executive couldn’t leave quickly — that would have sent a terrifying signal to the markets, potentially triggering a steep downturn in the bank’s fortunes.
Such is the nature of banking. If your clients smell anything wrong, a self-fulfilling crisis of confidence ensues and the whole thing can come tumbling down.
This may be what we’re seeing with Credit Suisse, one of the biggest banks in the world, whose shares plummeted by as much as 30 percent Wednesday. Regulators need to dismantle the bank before things get worse and depositors — not just shareholders — stand to lose their money. Taking this step now, in an orderly fashion, could prevent even more pain later.
Credit Suisse has had problems for a while. The bank has lurched from one scandal to another in recent years. In the wake of the collapse of Silicon Valley Bank, the global financial world is jittery. This is not the time for even a minor mishap.
Credit Suisse delayed its annual report last week at the behest of the Securities and Exchange Commission. When it published its 2022 data on Tuesday, it admitted there had been “material weaknesses” in internal controls over its financial reporting from the previous two years. After this astonishing acknowledgment that the numbers could be wrong, the bank tweeted that “it would like to reiterate . . . our financial results for 2022 and preceding years are accurate and reliable.”
This attempt at reassurance via social media seems to have comforted precisely no one.
One column is not enough space to detail the steady stream of multibillion-dollar mishaps and other gaffes at the bank, but some doozies from just the past few years include: a $5.5 billion loss from the collapse of hedge fund Archegos Capital, which a report commissioned by Credit Suisse blamed in part on “a lackadaisical attitude towards risk and risk discipline”; the collapse of $10 billion in funds that invested Credit Suisse clients’ money into loans brokered by the disgraced Australian financier Lex Greensill, which the Swiss regulator ruled was the result of serious lapses and deficiencies in the bank’s structures and processes; and a “tuna bond” scandal that involved a scam tied to loans to Mozambique — a fishy mess that has resulted in hundreds of millions of dollars in fines from regulators worldwide.
In addition to all this, the bank’s CEO resigned in February 2020 after a corporate espionage scandal, while its chairman left in January 2022 after it was determined he had broken lockdown travel rules. U.S. authorities are also investigating how the bank allegedly helped clients avoid taxes.
Defenders of Credit Suisse say that other banks have had their own run of bad behavior and emerged healthier, and a technical analysis of its balance sheet metrics shows that it has plenty of capital. But these arguments ignore important context. Historically, depositors and other bank counterparties are hardly rational when fear is in the air. Who has time to look at tier 1 capital ratios when you’re urgently shifting your cash to a bank with a less blemished recent history?
The management of Credit Suisse knows this problem well. In the final three months of 2022, clients withdrew more than $100 billion after a rumor — then unsubstantiated — began circulating online that the bank was in deep trouble. The money has not come back.
So what should happen now? Switzerland, of course, is a home for finance, and shutting down a 160-year-old bank is not an easy choice. But regulators and the bank’s management must act swiftly. Time is critical. A disorderly unraveling of Credit Suisse is not a certainty just yet, but such an outcome for a giant global bank must be avoided if at all possible. The impact and potential for contagion would be magnitudes greater than for the collapse of Silicon Valley Bank.
With a bank that cannot be fixed, the only solution is to break it up. Sell off every part to competitors. Change management. Change the culture. Bond and equity holders would be wiped out, yes. But depositors and the bank’s clients would be relatively unscathed, reducing the risk of contagion and limiting the cost of the rescue.
Without such an emergency intervention, Credit Suisse could perhaps survive this latest chaos. But why should it? The financial world would be better if fears were not allowed to linger but were dealt with rapidly and with great conviction.