CREDIT SUISSE:

RISE OF THE NEW

LEHMAN?

AUTHOR: AMAN RASTOGI

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It has been often said that ‘Those who cannot learn from history are doomed to
repeat it.’ It appears that Credit Suisse is one of those who haven’t learnt.

Ever since the pandemic engulfed the planet in 2020, Credit Suisse, a global financial
services company, has been battling another disease altogether. From the perspective of its
long term survival, its problems are even more fatal than COVID-19. It all began with the
collapse of Greensill Capital, a supply chain financing company, in March 2021.

What is the Greensill Capital collapse all about, and how is Credit Suisse involved?

Greensill, a fintech company, identified a gap in the market. Hitherto, whenever there was
a transaction between a buyer and a seller in any industry, there was a time lag between
the supply of goods and the payment of money. Lex Greensill, founder of Greensill Capital,
devised a system where Greensill will act as an intermediary by paying the cash to the
supplier immediately, and getting an IOU (I owe you) note from the buyer. In a utopian
setup where the buyers and sellers have good business foundations, Greensill perhaps has
the perfect business model, and helps smoothen the payments system across industries.

However, if you delve a little deeper into this model, you may start seeing subtle, but
dangerous problems lurking inside. Greensill’s modus operandi is to take short term loans
from banks and other financial institutions to pay the suppliers immediately, and when
they buyer pays their due, Greensill would repay the loans it took. See the problem?
Alright, let me explain.
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Let’s say we have a supplier Alpha, a buyer Beta, a bank X, and our very own Greensill.
Alpha sells goods worth $100 million to Beta with a payment cycle of 3 months. Greensill
agrees to pay Alpha immediately for a small discount (say $99.5 million, with a neat $0.5
million commission). But, Greensill does not have this money on hand and thus, borrows
this amount from Bank X. Now, 3 months later, Beta suddenly says that it cannot pay and
defaults on its $100 million repayment. This means that Greensill cannot get the $100
million and cannot repay the loan it took from Bank X. This way, Greensill and Bank X
suffer huge losses. Now, so far as financing actual business transactions was concerned,
the model was still quite safe. However, the problem actually deepened further when
Greensill started creating securities to raise money based on ‘predicted sales transactions’.
Seems reminiscent of the 2008 financial crisis, right?
Now, if the scale was larger with multiple sellers, buyers, and banks involved, a single large
default can affect the entire economy, and this is exactly what happened.

Getting back to the issue at hand, how was Credit Suisse involved? Well, Credit Suisse was
one of the major bankers involved in this system. The financial institution had provided a
$140 million loan and was also managing $10 billion worth of securities created by
Greensill. When Greensill’s primary insurer, Japanese insurer Tokio Marine Holdings Inc,
which provided $4.6 billion of coverage to Greensill credit notes, discovered this
potentially dangerous system, it revoked its insurance coverage over Greensill, which led
to Credit Suisse freezing the $10 billion funds. This started a rapid scramble for fund
recovery by investors, which only worsened the issue. So far, the bank has paid out $5.6
billion and counting.

This crisis of liquidation of the $10 billion funds by Credit Suisse was not unwarranted, nor
was it surprising. Infact, FINMA, the head of Switzerland's financial regulator, had
questioned Credit Suisse over the risks involved in its dealings with Greensill Capital many
months before the bank was forced to close $10 billion of funds linked to Greensill. Today,
Credit Suisse is still paying out the $10 billion out of its own pockets, because Greensill has
already collapsed and gone bankrupt.

LEX GREENSILL, FOUNDER OF GREENSILL CAPITAL

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And what about Archegos Capital?

Interestingly, the story is not so different from Greensill, and the timing of this collapse couldn’t
have been any worse for Credit Suisse. In our previous article explaining the implosion of Archegos
Capital, we explained how the implosion was caused by risky involvements in total return swaps and
subsequent defaults which created a financial crisis involving billions of dollars. The important
takeaway here is that this was yet another risky system of payments where Credit Suisse tangled
with billions of dollars, and failed to act on the highlighted risks in due time. The bank suffered from
losses worth $4.7 billion and attracted sharp criticism from shareholders, especially due to the fresh
losses from Greensill.

Is Credit Suisse definitely doomed, or is there a silver lining?

While difficult, there may be a silver lining still. Quite recently, the bank offloaded several of its top
executives, including the risk chief. It has also brought in a new Chairman, Antonio Horta-Osorio, a
57-year-old British Portuguese banker, after these two large losses. Antonio immediately turned the
bank’s focus towards risk management after joining in April. He also took multiple steps on the
fronts of Archegos and Greensill defaults including the following:

1. Horta-Osório bought $1.2 million of Credit Suisse shares with own money. Three months later,
he purchased another $1 million worth of stock in the Swiss bank.
2. Horta-Osório said "I am certain that we can lead the bank back to where it belongs, but it will
take time" in an interview widely viewed as a trust-building exercise.
3. Proposed UBS veteran Axel Lehmann to head board’s risk panel, and long-term associate, and
risk manager at Lloyds Bank Juan Colombas as board member.
4. Credit Suisse set up counterparty risk management under ex-trader and risk executive Amélie
Perrier in its investment bank. Three weeks later, the unit’s risk chief is axed and several former
executives are reinstated.
5. Credit Suisse made public an excoriating legal review of its handling of Archegos and revealed
countless loopholes and shortcomings
6. Goldman veteran David Wildermuth appointed chief risk officer to be in place by February 2022
7. Credit Suisse permanently replaced Michel Degen, who was instrumental in setting up the
Greensill supply-chain funds. Two weeks later, Degen is quietly removed from the commercial
register of the bank’s Swiss asset management unit

The number of key changes make conspicuous the intensity of efforts and commitment taken by
Credit Suisse to improve its risk management policies as well as its reputation as a financial
institution.

LEX GREENSILL, FOUNDER OF GREENSILL CAPITAL

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Concluding note

Despite the flurry of reforms and changes in the key top management, it is difficult to ignore the
grim picture presented by Credit Suisse. The firm has been hard hit by monetary and reputational
damage, which perhaps will not go away even in a decade. Investor confidence has been really hard-
hit with two back to back multi-billion dollar scandals, and it will be hard to win them back, given a
lot of other investment banks and financial institutions are expanding their domains and market
shares. Infact, according to Reuters, one of the measures to recover from this crisis includes a
merger with UBS, a rival investment bank. Further, the bank's executives fear the bank may also be
challenged by investors demanding its break-up, or given the shrinkage of its share price in the
market, Credit Suisse is currently vulnerable to hostile takeovers.

The article began with a quote mentioning that those who do not learn from history are doomed to
repeat it, and as you now understand, Credit Suisse failed to learn from the 2008 financial crisis,
and repeated the mistakes of Lehman Brothers in its failed risk management policies. But there still
may be a silver lining, if the bank learns from its own mistakes from Archegos and Greensill.

LEX GREENSILL, FOUNDER OF GREENSILL CAPITAL