Credit Suisse in turmoil: Is the bank splitting up?

Fri, Sep 23rd 2022

Hours after a report was published alleging that Credit Suisse was splitting into three parts, its stock began plummeting and the bank challenged the report – causing panic among investors. The chaos this week is only the latest in a string of scandals and lawsuits the bank has experienced in the last three years.

Credit Suisse was founded in 1856 to fund the development of Switzerland’s railway system.

The split

Yesterday morning, Financial Times reported that Credit Suisse has created a blueprint for splitting its investment bank into three parts: the bank’s advisory board, a “bad bank” to hold high-risk assets, and the rest of its business. The “bad bank” would be slowly decreased, and the advisory board could be transformed in the future. In addition, the plans call for selling off securitized products to prevent a critical rise in capital.

The alarm was first sounded when Credit Suisse directors Blythe Masters and Michael Klein suggested at an internal meeting this month that the bank could offer investment bankers an equity stake in the business, according to Bloomberg. Moreover, the bank’s board is considering reviving its defunct First Boston brand – which was the investment banking division for Credit Suisse until 2006, according to Reuters.

At any rate, the bank is looking to avoid going to the market for funding given its depressed share prices, which sits at a 30-year low. Before FT published its article Thursday morning, the bank was trading at 0.28, far below its rival UBS, which trades at 1.

The fallout

Hours after the article was published, Credit Suisse saw its shares fall another 5.5 percent in Zürich trading. Then, the bank spoke up.

“Credit Suisse is not exiting the U.S. market. Any reporting that suggests otherwise is categorically false and completely unfounded,” a representative for the bank said in a statement late Thursday. The bank spokesperson added that Credit Suisse would update investors on its strategy when it reports its third-quarter earnings next month.

Rival banks UBS and Credit Suisse are neighbors on Zürich’s Paradeplatz.

The shake-up

Over the summer, former chairman Axel Lehmann installed Ulrich Körner as chief executive along with a brief on how the bank would undergo a “radical shake-up,” including cutting loose about 5,000 employees (roughly 10 percent of their workforce).

The dramatic shake-up was proposed after the Zürich-based bank had endured years of scandals, lawsuits, and record trading losses. Lehmann and Körner are working hard to shore up confidence among investors that the bank can be profitable again.

Fraud and bribery: Inside Credit Suisse’s scandals

In October of 2021, U.S. and U.K. authorities handed down a verdict that Credit Suisse must pay CHF 439 million to resolve a Mozambican corruption scandal which included bribery and fraud charges.

According to the lawsuit, Credit Suisse helped arrange nearly $1 billion in bond offerings and a syndicated loan for the Mozambique tuna fishing industry between 2013 and 2016. But much of the proceeds from the “tuna bonds” were diverted into kickbacks for Mozambique officials and Credit Suisse bankers. To cover their tracks, Credit Suisse misled investors and violated U.S. bribery laws, U.S. officials say.

About $175 million in fines will go to the U.S. Justice Department, $99 million to the U.S. Securities and Exchange Commission (SEC), and $200 million to U.K. authorities. The bank will also forgive a $200 million of debt Mozambique owes.

The bank still faces a civil trial with London creditors over the Mozambique deal; it is scheduled for October 2023.

The same week that the bank was given the verdict in the Mozambique trial, the Swiss Financial Market Supervisory Authority announced it had discovered “serious organization shortcomings” in its investigation into a corporate espionage case that began with a 2020 audit of the bank. According to the investigation, Credit Suisse spied on members of its board and former employees. (Read more: Hiding your money? Don’t use Switzerland).

Iqbal Khan (right) and Tidjane Thiam (left) were at the center of a spying scandal that apparently began as neighborly squabble (credit: 24 Heures).

Spies and lies

The spying scandal began at a new year’s eve party held at Credit Suisse CEO Tidjane Thiam’s home in a wealthy Zürich suburb. One of the guests, the bank’s then-wealth management chief Iqbal Khan, remarked on Thiam’s garden, which “set off a bitter feud between the two alpha males,” according to Bloomberg. Khan, who was also Thiam’s neighbor, had some concerns about his trees.

The feud was never resolved and Khan left Credit Suisse seven months later for a position at its rival bank, UBS Group AG. At some point around Khan’s departure, Thiam and others at Credit Suisse allegedly began spying on Khan to, they say, prevent him from poaching private bankers to UBS.

Khan reported to authorities that he believed he was being spied on after three men chased him and his wife through the streets of Zürich by car and on foot. An investigation ensued that appeared to clear Thiam’s name, but the soap opera of events ended in him stepping down from his CEO position. Moreover, Thiam’s top lieutenant and the bank’s head of security were fired; and, a consultant involved with the espionage took his own life.

Looking to the future

Right now, Credit Suisse faces a capital gap of at least CHF 4 billion, according to analysts at Deutsche Bank AG. Credit Suisse lenders say they are comfortable with the bank’s capital and that it would “be premature to comment on any potential outcomes before” the investors meeting slated for October 27.

This article may be freely shared and re-printed, provided that it prominently links back to the original article.

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