Credit Suisse Group AG, once one of the strong leaders of the global financial system, no longer exists.
After tense talks over the weekend, UBS Group AG agreed to buy Credit Suisse in an all-stock deal for about $3.25 billion, less than the market value of troubled U.S. lender First Republic Bank. The government-brokered sale marked the final fall of the Swiss bank, succumbing to a crisis of confidence that threatened to spill over into global financial markets.
For 166 years, Credit Suisse helped position Switzerland as a mainstay of international finance and stood up to the titans of Wall Street before a constant barrage of scandals, legal problems and management upheaval eroded investor confidence. While the decline took years to develop, the end came quickly.
After the collapse of Silicon Valley Bank last weekend, the long-suffering Credit Suisse quickly became the center of concern. After top shareholder Saudi National Bank told Bloomberg Television on Wednesday that it “absolutely will not” invest more in the lender, a rout has begun.
A $54 billion funding backstop from the Swiss central bank — sealed at midnight Thursday to calm nerves — failed to become the lifeline Credit Suisse had hoped for. With the country’s banking sector at risk, Swiss authorities stepped in to make UBS a reluctant white knight.
The Swiss government “regrets that the CS was unable to deal with its own difficulties — that would have been the best solution,” Finance Minister Karin Keller-Sutter told a news conference in Bern on Sunday. “Unfortunately, the loss of market and customer confidence could no longer be stopped.”
Designated as one of the world’s 30 systemically important banks, Credit Suisse has been the biggest victim of the financial turmoil caused by central banks tightening monetary policy to tame inflation. While concerns about further contagion are sure to persist, the UBS sale avoided a disorderly collapse.
Before the global financial crisis — which Credit Suisse survived without a bailout, unlike many of its peers — the Swiss lender had more than $1 trillion in assets, but after years of meltdown, those have shrunk to about $580 billion, roughly half of UBS’s assets.
“Let’s be clear, as far as Credit Suisse is concerned, this is an emergency bailout,” said UBS chairman Colm Kelleher, who will stay on after the deal.
For Switzerland, the blow could be significant. Home to 243 banking groups and 24 branches of foreign banks, the country’s stability and wealth largely rely on the financial industry. The combined assets of UBS and Credit Suisse are roughly twice Switzerland’s gross domestic product, and Sunday newspapers from tabloids to electronic editions were filled with stories about the impending death of a national icon.
Even as market anxiety intensified, Credit Suisse insiders acted as if they could still control the situation. Although the mood was somber, managers held town hall meetings to allay employee fears and investment advisers took calls from clients to discuss liquidity concerns, according to people familiar with the discussions.
But in his hometown of Zurich, doubts and disillusionment are growing. Outside its headquarters on the majestic Paradeplatz, someone scrawled: “The next bank to go bye?” That question was later replaced by expressions of anger and disgust as reality gradually set in.
Throughout its history, Credit Suisse has financed Alpine railways and the development of Silicon Valley. He looked after the fortunes of Arab royals and Russian oligarchs and leaned towards the giants of Wall Street. But he struggled to control risk and consistently make money.
The bank has suffered from a revolving door of senior management in recent years, with each leadership change putting more pressure on performance. Shares have tumbled more than 95% from their peak before the financial crisis and the firm was valued at just 7.4 billion Swiss francs ($8 billion) at Friday’s close – less than a tenth of Goldman Sachs Group Inc’s value. .
“In Zurich, we had a ringside seat to this spectacular fiasco in slow motion,” said Matthew Rüsch, founder and managing partner of Broad Creek Capital, a family office. “We’ve watched the bank swing from scandal to scandal for so long that it’s hard to remember them all at this point.”
The seeds of Credit Suisse’s rise and eventual fall were sown in the summer of 1990, when then-CEO Rainer Guth saw a chance to take control of the Swiss bank’s American partner First Boston for a modest capital injection and to cover bad loans.
First Boston had embraced high-yield debt markets in the 1980s and committed billions of dollars to finance risky buyout deals. The once-lucrative industry collapsed, and one of the most troubled deals was a $457 million loan to buy out the Ohio Mattress Co.
As a result of the takeover, Credit Suisse embraced the same kinds of risky businesses — such as leveraged finance and mortgage bond trading — that led to the fiery deal. Successive executives at the Swiss lender pushed through numerous overhauls, eventually abandoning the once-proud First Boston name in 2006.
The takeover was part of an aggressive growth strategy, including acquisitions of Swiss competitors, and complexity continued to grow. After succeeding Guth as CEO, Lucas Mühlemann bought Winterthur Insurance Co. in 1997. The Swiss bank then acquired Donaldson, Lufkin & Jenrette Inc. in 2000, but the deal for the New York-based investment bank turned out to be a costly mistake, as several of DLJ’s top bankers left for competitors in short order.
Winterthur was then sold in 2006 by then-CEO Oswald Gruebel, who ran the bank alongside John Mack for a short time. Frequent management changes have created strategic upheaval at the top while adding pressure on rank-and-file staff to generate returns.
Cut and paste
In 2015, a fraud was uncovered by a private banker who had no clients and no banking experience before joining Credit Suisse. After the market turmoil of 2008, Patrice Lescaudron – a quiet Frenchman – began secretly digging into a wealthy client’s account, using the money to try to pay back the losses of other clients.
The scams were shockingly simple. He cut the signature out of a document, placed it on trade orders and photocopied them, according to Lescoderon’s own admission. There were red flags along the way, including verbal warnings and written warnings from supervisors in 2008, 2011 and twice in 2013 for violating compliance policies. Still, Credit Suisse couldn’t stop him. He was convicted of fraud in 2018 and took his own life in 2020.
As the money flowed, the bank condoned Lescaudron’s misconduct, according to an independent investigation commissioned by Finma, the Swiss banking regulator, although it did not conclude the bank knew about the fraud.
In January 2019, a long-simmering feud between then-CEO Tijan Thiam and Iqbal Khan, who ran wealth management and aimed to one day head Credit Suisse, erupted at a dinner party in an affluent suburb of Lake Zurich.
What began with Khan’s dismissive remark about Thiam’s garden turned into a sinister corporate scandal, shattering the company’s reputation for discretion and revealing a culture where personal vanity trumped ethical and legal boundaries.
A few weeks after the dinner, Khan was passed over for a promotion and then left in July. When he later took a job at UBS, the move raised concerns among Credit Suisse’s senior ranks that he might lure away key personnel. A private security firm is hired to monitor his activities, but is discovered by Khan in an incident that leads to a physical altercation.
Although the bank was quick to dismiss the embarrassing incident, it soon became clear that it was not unique. Thiam was forced out in February 2020, with then-chairman Urs Rohner blaming “deterioration of trust, reputation and reliability among all our stakeholders”.
As part of an investigation sparked by the Cannes episode, the Swiss banking regulator in October 2021 revealed five additional cases of surveillance from 2016 to 2019. The toxic atmosphere at the top contributed to damaging operational errors.
In March 2021, Credit Suisse’s trading desk was informed that its largest customer would not be able to pay more than $2 billion it owed the next day. Archegos Capital Management, the New York-based investment firm that managed the personal fortune of billionaire Bill Huang, spent the previous two days paying off other creditors after big bets fell through and there wasn’t enough left for Credit Suisse.
The news sparked an internal blame game, with executives in New York, London and Zurich turning on each other instead of focusing on damage control. Rivals quickly sold off Archegos’ collateral, and it took nearly two weeks for Credit Suisse to come up with an initial estimate of its exposure: $4.7 billion. It would eventually grow to $5.5 billion, wiping out more than a year of profit and plunging the bank into an existential tailspin that led to last week’s crisis of confidence.
Executives have already come under fire for failing to protect the bank and wealthy clients from the collapse of a $10 billion fund suite it ran with now-disgraced financier Lex Greenseal. The twin episodes shocked the financial world — but, in retrospect, they were decades in the making.
The bank’s complexity, culture and controls were to blame for Archegos’ huge loss, according to an independent report on the collapse by law firm Paul, Weiss, Rifkind, Wharton & Garrison. Credit Suisse had a “negligent attitude to risk” and “failed at many points to take decisive and urgent action”, the report concluded.
The bank responded with a series of measures to correct the shortcomings and promised to use the incident as a “turning point for its overall approach to risk management”.
But time ran out.
In October last year, the new leadership duo of chairman Axel Lehmann and chief executive Ulrich Koerner – who took over last year after the fallout from trading failures – pitched a return to Credit Suisse’s Swiss roots as the best way forward.
They cut jobs and raised $4 billion in fresh capital. Most importantly, they planned to spin off the investment banking operations and eventually spin off the revived First Boston unit to end a three-decade effort to compete on Wall Street.
“The new Credit Suisse will definitely be profitable from 2024 onwards,” Koerner said after unveiling the restructuring plan. “We don’t want to over promise and under deliver, we want to do it the other way around.”
But the world did not stand still. The end of cheap money was over, the global economy was in turmoil and investor confidence was in short supply – a combination that proved too much for a bank that never learned the lessons of the global financial crisis.
“The banking sector is not like any other sector,” said John Plassar, an investment specialist at Geneva-based Mirabaud. “Once you lose trust, you can’t just rebuild it.”
– With the assistance of Claudia Madler, Natasha Doff, Philipp Lagercranser, Loukia Giftopoulou, Donal Griffin, Hugo Miller, Sagarika Jaisinghani, Julien Pontus, Allegra Catelli, Bastian Benrath and Bryce Bashchuk.