Credit Suisse First Boston: Has the Ship Sailed?

On the 27th October, current Credit Suisse (CS) CEO Ulrich Körner announced to shareholders the latest restructuring plan his bank will undertake to regain the share value it has lost in the last few years. A series of scandals, stemming from poor risk management and permissive governance, has led to Credit Suisse’ share price falling close to 60% in the last year. The restructuring plan is the second attempt at stabilising the bank in the last two years, with the former CEO Thomas Gottstein announcing a similar plan before leaving due to pressure from scandals and poor performance.

The latest restructuring plan involves downscaling the investment bank significantly and focusing on Credit Suisse’ strong wealth and asset management businesses. The investment bank will look to offload capital in the volatile securities business and focus more on mergers and acquisitions as well as capital markets. The restructuring will require an additional $4 billion from investors. An external memo released described the investment bank reshuffle as “CS First Boston is expected to be more global and broader than boutiques, but more focused than bulge bracket players”. Critically, the investment bank will spin off into an independent firm, and will be renamed CS First Boston in a nostalgic bow to its banking history.

The recent flurry of scandals began in March 2020, when then CEO Tidjane Thiam was forced to resign after an investigation had found that the bank had hired private detectives to spy on the former head of wealth management Iqbal Kahn after he had left Credit Suisse for competitor UBS. Credit Suisse tried to downplay the event, but further investigation from the Swiss regulator FINMA found that there had been seven other incidents of spying between 2016 and 2019, and stated that there were serious organisational shortcomings within the bank.

A year later, Credit Suisse was marred in further controversy when British financier Greensill Capital collapsed. Greensill Capital was a supply chain finance firm, providing interim finance to businesses that need to pay suppliers in advance. This allowed banks such as Credit Suisse to sell Greensill’s debt to investors. The debt was advertised as low risk due to the fact that the underlying credit was insured. However, in March 2021, Greensill Capital collapsed after its insurance provider stopped underwriting its debt. This led to Credit Suisse freezing $10 billion worth of funds which were not fully repaid, losing a significant amount of money for clients in its asset management division.

The turmoil of March 2021 did not end there for Credit Suisse, when Archegos Capital Management, a family office and client of CS’ prime brokerage business defaulted. This led to losses of $5.5 billion for Credit Suisse, who were the worst affected of the bulge bracket banks by the default. Other investment banks had suffered losses, but these had been limited due to other banks to settling some of their positions with Archegos prior to the default. David Soloman, CEO of Goldman Sachs, stated that “We identified the risk early and took prompt action consistent with the terms of our contract with the client”, praising the risk management of his firm.

An independent report into the incident criticised Credit Suisse for focusing too much on short-term profit maximisation and not recognising the extreme risk-taking behaviour of Archegos. As a result of both losses, Credit Suisse had to raise an additional $1.9 billion in capital from investors to sure up its balance sheet.

The current Chair of CS, Axel Lehmann, admitted in May of this year that CS has failed to be proactive in risk management and that the scandals that have plagued the bank cannot be perceived as isolated incidents. The current restructuring plan intends to limit the sources of risk, but it is likely that a complete reform of how CS assesses risk is also necessary to limit any future scandals.

The use of First Boston to define the new “boutique bracket” investment bank is an interesting strategical move. First Boston was a US-based investment bank, which was first partially acquired by Credit Suisse in 1988, with the acquisition being completed fully in 1996. The bank was renamed Credit Suisse First Boston, commonly referred to as CSFB.

CSFB was a significant competitor in the late 90s, gaining success underwriting IPOs for many high-tech companies. CSFB operated as a bulge bracket investment bank and was officially integrated into Credit Suisse in 2005. Many banks were chasing the universal bank model at the time, making this integration sensible. The might of the original CSFB is in contrast with the new CSFB, which is being downsized to offer a more bespoke service than bulge bracket banks.

If the restructuring takes place as planned, it will be interesting to see how well the investment bank can attract clients due to its reduced offering of services. Direct comparisons in the market are Jeffries and PJT Partners, who have experienced sustained profitability in recent years. However, the detachment of the bank from consumer deposits will make CSFB’s balance sheet more unstable, and the significant losses experienced in 2021 cannot be repeated if the new investment bank is to survive.

CSFB made its name in the late nineties and early naughties, when high risk-taking was rewarded with significant profit and compensation. However, severe risk-taking has led the investment bank to its knees, and it is clear that prudent risk management is necessary. This new risk strategy of CSFB will need to be significantly different from that of the original investment bank.

The recent turmoil has left Credit Suisse vulnerable to a takeover, with rumours of a merger between CS and UBS intensifying. The actions of the new management team will likely decide the future of the bank. A repeat of previous missteps may lead to the vanishing of the Credit Suisse name, let alone First Boston.

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