What Happened to Credit Suisse?

Employees of Credit Suisse Group AG, desperate to learn of the fate of the Swiss bank after days of chaos and confusion, dialed in to a hastily arranged call Sunday night after the bank’s $3.25 billion government-driven sale to UBS Group AG had been announced.

Their pressing question for CEO Ulrich Koerner: Do we still have jobs?

But the call just led to more chaos and confusion. Due to technical difficulties, the call ended after just 10 minutes, while many were still trying to get through. Those who were able to attend heard Koerner explain that the deal “was the best we could get under the circumstances.”

It was the second time in a week that Koerner had tried to reassure people. And the second time that effort had failed. The message underscored what investors and central bankers the world over had watched play out in stunning fashion over the prior week. Credit Suisse, a cornerstone of the Swiss finance industry for decades and one of 30 systemically important banks across the globe, stumbled from one scandal to another in recent years, each one leaving it more battered. The most recent crisis—triggered by U.S. regional bank failures and some blunt words from its biggest shareholder—was one it wouldn’t survive.

Behind the scenes, Credit Suisse’s fate was sealed as far back as Thursday, when the bank announced it was getting a lifeline of up to $54 billion from the central bank and buying back as much as $3 billion of debt. As it turns out, the plan was designed to buy time for the financial regulator FINMA and the Swiss National Bank to secure a sale, not for Credit Suisse to rescue itself.

In the end, the bank had little choice but to accept a marriage of convenience with its nearest neighbor for a sliver of what the 166-year-old institution was worth in its heyday. Koerner and the rest of the Credit Suisse management team were marginalized as emergency weekend talks—led by Swiss National Bank (SNB) President Thomas Jordan—to sell the group to UBS gathered pace.

When the terms of the initial UBS offer, which valued Credit Suisse at just 1 billion francs, landed on Sunday morning, the Credit Suisse managers were outraged. The price tag was seen as derisory for a bank that had a market cap of $8 billion at the close on Friday. Shareholders would be wiped out, managers argued.

Saudi National Bank—Credit Suisse’s largest shareholder—urged Credit Suisse to reject the offer. Calls went out from Credit Suisse to various institutions, including Deutsche Bank AG, in a last-ditch attempt to find an alternative. But the complexity and timeframe meant there were no takers. A full sale to UBS was the only option. That triggered a final round of back and forth, which lifted the price to 0.76 francs per share. That’s 99 percent lower than Credit Suisse’s peak share price.

It was the so-called “Swiss” solution to a Swiss problem. But the wider financial system was holding its breath over the weekend. A failure to reach a deal risked widening the crisis, sending markets into a tailspin and increasing the likelihood of contagion.

“If we as a country, where finance makes such a large part of GDP, are not able to send out a signal like that ‘we can stop this’—then we can close down,” said one Swiss official. “Nobody in the world will believe us anymore.”

This account of the final week in the life of one of the world’s biggest banks is based on conversations with more than three dozen Credit Suisse bankers, advisers, shareholders and clients.

Attempts at Reassurance Fail

Just six days before the UBS deal was revealed, Koerner had sought to reassure investors that Credit Suisse was on a stable footing after its stock price tumbled, with markets seeing it as vulnerable to rising interest rates in the wake of the collapse of Silicon Valley Bank in the United States. Credit Suisse had added to the jitters on Tuesday when its annual report, already delayed by U.S. regulators’ questions on its accounting, flagged a material weakness in its financial reporting controls and said client outflows had continued into March.

But before Koerner could measure whether his words had worked, the stock went into its biggest one-day dive since the financial crisis, triggered by Saudi National Bank Chairman Ammar Al Khudairy’s remark on Wednesday that his institution had “absolutely” no intention of adding to its stake in the bank, which some interpreted as a lack of confidence in the group’s turnaround. Although the Saudi National Bank would later roll back the comments, saying that it merely wanted to stay below a 10 percent regulatory threshold, the damage was done.

In the two hours after Al Khudairy’s comments aired on Bloomberg TV, the bank’s most liquid bonds tumbled by 9 to 10 cents on the euro. By day’s end, many of the securities were down as much as 30 cents, an almost unprecedented fall in the world of investment-grade debt that raised concerns about Credit Suisse’s ability to borrow and avoid a default.

To some, Al Khudairy’s comment looked like an act of self-sabotage. In a hastily assembled virtual war room at the Credit Suisse headquarters in Zurich’s Paradeplatz, executives could only watch as the share price fell by as much as 31 percent at one stage. Koerner had previously said he and his team couldn’t control the share price, but bonds plummeting to distressed levels was a worrying sign for clients, investors, and counterparties.

Just after 1 p.m. local time, Credit Suisse CFO Dixit Joshi determined it was time to put a stop to the frenzy, according to people familiar with the discussions.

Credit Suisse executives ultimately decided on buying back bonds, as they had done last fall when $100 billion of client money walked out the door. But they would do it only in conjunction with a letter of support from their regulators and central bank.

They seemed to get their wish and more. The SNB, based just a few hundred meters away, and FINMA publicly said Credit Suisse was healthy and eligible to tap the central bank for the cash it needed. But the regulators also felt it was time for them to orchestrate a private sector solution as fears of a bank run, and wider financial chaos, mounted. They asked UBS to come up with a purchase offer. It was less of an ask than a demand, as it turns out. The only other option was nationalization.

At 1:45 a.m. on Thursday, Credit Suisse announced it would borrow up to $54 billion and repurchase debt. Shares surged as much as 40 percent, the most on record. Al Khudairy told CNBC that “everything is fine.”

The central bank lifeline helped put a floor on bond prices and stem the frenzied selling. Executives had put out the word to shareholders and regulators: This is just about confidence. We have cash. We have capital. What we need is some calm.

But internally, many were saying that the bank could not continue by itself. Wealthy clients in Asia, Europe, Switzerland, and the Middle East were already calling their bankers to pull out cash or move holdings. Several billions of dollars of client money left in just one day. Institutions were also reassessing and repositioning any exposure to the bank.

Though much of the world was watching the stock, the real trouble for Credit Suisse played out in the debt market. The company’s short-dated credit-default swaps (CDSs)—derivative instruments used to hedge against the risk of default on bonds—showed the depth of concern behind the drop in share price. On Wednesday, the lender’s one-year CDS ballooned out to levels not seen on large systemic banks since the 2008 crisis.

Banks with exposure to Credit Suisse desperately scrambled to hedge their risk. The panic fed on itself, one trader said. The bank’s one-year CDS went from a spread of 799 basis points (bps) at the start of Wednesday—alarming in itself—to 3,701 bps, according to pricing source CMAQ. Quotes from Wall Street trading desks were even wilder. They signaled full-blown investor panic over the bank’s future.

One investor said it wasn’t a rational market. The CDS prices were so high that it didn’t even make sense to hedge the risk of default.

Another said it was reminiscent of what happened to some banks during the European sovereign debt crisis of 2010 and 2011. Those episodes were driven by fundamental problems. In the case of Credit Suisse, it was a question of credibility—that even with implicit support from the SNB, worries around the bank could prove fatal.

“In this case, a bank could fail although there was no major loss on the balance sheet; this is a kind of self-fulfilling prophecy,” said Jochen Felsenheimer, a portfolio manager at XAIA Investment Gmbh, who manages €1.4 billion of assets. “If everyone believes it will fail, it fails.”

Resolution of the Crisis

Beyond the public shows of support, the Swiss finance ministry, central bank, and FINMA spent Wednesday into Thursday discussing ways to resolve the crisis once and for all. Jordan, the SNB president, was spotted leaving the finance ministry in Bern around 2 p.m. on Wednesday. Among the options considered were a separation of the bank’s Swiss unit and a tie-up with larger rival UBS.

Some staff, shell-shocked by the swiftness of the escalating crisis, talked of despair within the bank. Activity in key businesses ground to a halt as investment bankers and wealth managers were reluctant to speak to clients, despite being urged to do so, because they had no answers for the inevitable barrage of questions. Trading desks were getting queries from funds and banks looking to cut counterparty risks.

Those bankers who were still answering calls said the volume of inquiries from clients and counterparties was disrupting daily business. One worried that the pipeline of transactions now on hold might not be revived.

In an indication of the doubts still swirling around it, the bank’s one-year CDS remained at highly elevated levels of 3,468 bps on Thursday, suggesting investors were still not convinced by the central bank’s reassurances.

Despite Koerner’s message to keep communication lines open with clients and stakeholders, some criticized management for not doing that with employees.

“Effective communication is key to ensure that our clients and external stakeholders understand the strengths of the bank,” the CEO said in a memo to staff late on Thursday. Namely, “our strategy and the accelerated progress we are making to create the new Credit Suisse.”

Yet in the London and Middle East operations, some managers were avoiding the office to dodge uncomfortable questions from junior employees seeking reassurance about the direction of the firm, said people familiar with the situation. In New York, trading floors emptied out on Wednesday, with many bankers relocating to the nearby Churchill Tavern to drown their sorrows.

Management reacted to the markets by sending around talking points, holding town halls—there was one with the wealth head for private bankers and another with the trading chiefs—in an attempt to explain the situation and encourage employees. But they did little to boost morale.

By this stage, talks with UBS were under way. The discussions, initiated by the government and FINMS, opened on Wednesday, according to Karin Keller-Sutter, Switzerland’s finance minister. The plan was always to present a “package” for Credit Suisse on Sunday, she said after the deal was announced.

Regulators across the globe had been fearful of the panic spreading. Keller-Sutter spoke to several international counterparts, including U.S. Treasury Secretary Janet Yellen, during the week. FINMA and the central bank knew a deal had to be done at the weekend. So began a manic 48 hours aimed at arriving at a price and working through many thorny issues: UBS’s reluctance to take on Credit Suisse’s money-losing investment bank, competition issues around combining the two biggest domestic banks, the size and structure of a government backstop, and whether to bypass shareholder votes.

Meanwhile, Credit Suisse is doing its best to convey it is business as usual. The bank confirmed on Monday that it will go ahead with a Hong Kong investment conference this week under the tag line “Embracing Reality.”  One of the event’s scheduled speakers: survivalist Bear Grylls.

—With assistance from Bastian Benrath, Aaron Eglitis, Jana Randow, Francine Lacqua, Steven Arons, Rachel Butt, Katherine Griffiths, Myriam Balezou & Eyk Henning.

 

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