Unveiling the Unethical: The financial meltdown at Credit Suisse (2024)

Last Wednesday at 1:45 AM Zurich time, a statement dropped mentioning that “Credit Susie is tapping the Swiss national bank for as much as 50 Billion Swiss Frank (USD 50 Billion). The reason is the biggest investor with a 10% stake in the firm, the Saudi National Bank refuses to invest any further”. Interestingly we are not talking about some regional financial institutions, Credit Suisse belongs to the "bulge bracket" banks which includes the multinational, brand-name banks that regularly handle billion-dollar transactions and employ thousands of people in financial centers around the world.

To understand this we need to go back to the summers of 2022. The Economic Times reported back in the 2nd quarter of last year saying“Credit Susie’s scandals - Spies, lies and money laundering”, This story sums up how the bank was operating in recent times. The Swiss investment firm is in the headlines recently due to its involvement in various financial scandals, which have raised serious questions about the company's ethical and legal practices. One of the most significant financial irregularities that Credit Suisse has been accused of is its role in the Archegos Capital Management scandal. Archegos, a family office run by Bill Hwang, was a major client of Credit Suisse's prime brokerage business. In March 2021, Archegos defaulted on its margin calls, leading to massive losses for several banks, including Credit Suisse. Credit Suisse's losses from the Archegos scandal are estimated to be around $5.5 billion. The bank has admitted that its risk management practices were inadequate and that it failed to act quickly enough to mitigate the risks posed by Archegos. This failure has raised concerns about the bank's corporate governance practices and its ability to manage risks effectively.

In addition to the Archegos scandal, Credit Suisse has also been accused of involvement in the Greensill Capital scandal. Greensill, a financial services company, collapsed in March 2021, leaving many of its investors and clients with significant losses. Credit Suisse was one of Greensill's largest investors and had provided the company with significant amounts of funding. Credit Suisse's involvement in the Greensill scandal has raised questions about its due diligence processes and its oversight of its investments. The bank has been accused of ignoring warning signs about Greensill's financial health and of failing to adequately monitor its exposure to the company. In addition to the above-mentioned scandals, Credit Suisse was also found guilty of spying on its former executives.

On the back of all this, the company's auditors found a material misstatement resulting its annual reports getting delayed. And of course, the firm is paying a hefty cost for this whole mess. Its net interest income is falling for the last 4 years and the company reported a loss of roughly $4 billion in its last 3 quarters. Recently the credit default swaps on the bonds have skyrocketed in price and are trading at 2 decades high. The stock price has also plunged more than 80% in the last 3 quarters.

With this new development last Wednesday, investors are sniffing out weaknesses in the financial system with FTSE dropping 3.8% in a single day. Currently, the Swiss government is working with the bank to come up with some backstop. As of today March 19, 2023, the financial times has reported that UBS has now reached a government-brokered deal to acquire Credit Suisse for a little more than $2 Billion after Credit Suisse initially rejected $1 Billion. This offer is a steep discount from the market cap of $8.5 billion as of Friday's close. Under the terms of this agreement all shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. Until this deal is closed, Credit Suisse will continue to conduct its business in the ordinary course and implement its restructuring measures in collaboration with UBS. The Swiss National bank has also reportedly given UBS a $100 billion liquidity line to get this deal done.

Currently, the central banks of the world are in a really tough spot. On one hand, they are trying to put the inflation genie back in the bottle while on the other hand spending billions ( ultimately increasing liquidity in the financial system that causes inflation ) to save the financial system. Stay tuned folks and Let’s see how this whole story plays out.