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Ugliest ducklings

5 April 2016 By Dominic Elliott

“There is nothing that I don’t understand in investment banking”. So said Tidjane Thiam on being unveiled as the new chief executive of Credit Suisse last March. Given such reassuring chutzpah, investors will be wondering how the former boss of insurer Prudential presided over almost $1 billion of losses in the last six months. The failings look both operational and strategic.

Thiam gave an official explanation in late March. Some high-risk trades that had previously been reduced had been increased without the knowledge of senior bank executives. He hadn’t been aware of the scale of certain trading positions. Thiam asserted that he had only found this out in January, and has blamed poor processes and a lack of openness from traders for his and colleagues’ fogginess.

There is another way to explain the mess: Credit Suisse, and Thiam as its leader, made four poor decisions.

The first was back in October. Back then, Thiam’s sensible objective was to make investment banking earnings steadier by reducing volatile positions. He immediately broke his own new rule. Credit Suisse retained significant exposure to two businesses that are among the most volatile from an earnings perspective: credit and securitised products trading. Thiam himself termed these assets “ugly ducklings”, but said that he didn’t mind that such trades have to be backed by large amounts of regulatory capital, because they usually generate high returns.

Brutal market conditions compounded the error of muddling the bank’s strategic approach. Credit Suisse suffered mark-to-market losses of $633 million in the fourth quarter and another $346 million of writedowns in the three months to March. The scale of the losses relative to total exposures suggests many positions were unhedged.

Credit Suisse’s top management ought to have been on high alert before the environment worsened given the risk the trades posed. Instead, the impression is of a management team that took its eye off the ball.

That might be because of a second poor decision: not talking enough. Credit Suisse’s top risk committee meets only four times a year to discuss market and credit risk, less often than some rivals. But like peers, the bank has informal sub-committees that meet more regularly. None relayed the requisite information to Thiam or Chief Financial Officer David Mathers. And Thiam only asked to discuss the size of Credit Suisse’s positions on a case-by-case basis with trading head Tim O’Hara at the end of January, according to company material quoted by Reuters. O’Hara was new in the job, which might have made communication less efficient than usual. But the severity of market moves in December should have prompted earlier action.

Botched external communications were the third mistake. Chairman Urs Rohner said at the end of March that there were no blind spots in Credit Suisse’s trading books, seemingly contradicting Thiam’s tone, if not the details of his comments. Risk-weighted assets in its trading business were flat in the fourth quarter, despite Thiam saying that Credit Suisse had cut back on some positions “very aggressively”.

There was also opacity around fourth-quarter losses. Hits from collateralised loan obligations were entirely omitted in one presentation slide, despite their significance. A Morgan Stanley analyst suggested on a conference call that the bank should have pre-announced its results given the unexpectedness of the losses.

Some investors will be heartened that Thiam has belatedly adopted the right strategy of cutting trading more deeply. But many will feel stung after putting in a combined $4.9 billion in Credit Suisse’s rights issue in December. By that time, the market had already moved against some of the risky trading positions.

The fiasco is demoralising for Credit Suisse employees. As Chief Executive, Thiam has no excuse for not demanding enough information to get up to speed – nor for stating, as he did on the analyst conference call, that it was “debatable” whether he should have needed to take a 40 percent bonus cut. He says there have been consequences, but the bank has announced no high-profile departures or changes to the frequency of its risk meetings.

If Thiam wants to keep his job and prosper, the big challenge is to get to grips with his trading business. Yet addressing the problem may have led to a fourth poor decision. Credit Suisse hacked back its exposure to some risky kinds of credit as conditions worsened, but since February prices of many such assets have snapped back. Credit Suisse should probably instead have bought some downside protection to limit losses and cut more slowly.

Thiam’s credibility has taken a knock. To regain the respect of staff and shareholders, he needs to ensure there are no more unpleasant surprises.



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