Rolling the Credits: Credit Suisse Suffers a Double Whammy

Date
28 April 2021

Jacob Miller

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  • Feb 15, 2020
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    The position that Credit Suisse finds itself in is extremely interesting - a real throwback, in many ways, to the sort of headlines we saw around the 2007-2008 financial crisis.

    The article is extremely detailed and, as such, I won't focus much on substantive content: I want to focus more on how applicants may look to discuss this phenomenon in interviews and during vacation schemes.

    First and foremost, the sort of fallout from the impending collapse, or even solvent restructuring, of any financial institution, is likely to result in substantial litigation as debtors and creditors jostle for position and contractual obligations are disputed. This presents a huge opportunity for firms with strong banking and financial litigation practices to ride this wave.

    On a more mid-long term note, any major FI running into challenges with liquidity and/or solvency, especially where it is so closely linked to lobbying problems such as those which are now to be subject to enquiry, almost invariably results in considerable regulatory change. Candidates may wish to explore how those firms with strong regulatory advisory practices may be able to capitalise on any subsequent change in the banking and financial regulatory landscape!
     

    Dheepa

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  • Jan 20, 2019
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    One section of the article mentions the view that "after the last financial crisis [reforms] did not address some of the underlying causes, such as outsized bonuses that encourage excessive risk-taking by bank executives." I have to say that I'm inclined to agree. When I studied banking law at university, I think what shocked me the most is that a lot of reforms introduced since the 2008 crisis lack any real bite. Most are voluntary and the only pressure to comply comes from shareholders.

    The almost $10bn in losses suffered by Credit Suisse on the Greensill fiasco alone allegedly resulted from executives and the chief risk officer overruling risk analysts on Grensill's risk rating mere months before its collapse. And while high profile dismissals and executive board changes make it seem like CS are taking the situation seriously, the bank is reportedly considering letting clients foot the bill for their losses rather than compensating them. CS position is that the funds were only offered to investors who were well aware of the risks. Any litigation investors bring is probably going to argue the contrary, that they did not know the risks and possibly that the bank failed in their duty of care to provide them with accurate advice.

    Without getting into it too much and likely boring everyone, case law demonstrates that the liability rule tends to favour banks. There generally is a heavy burden on clients to prove breach of any statutory, common law or fiduciary duties. Needless to say this is going to be one long ride for angry investors, and not one that seems likely to lead to a positive outcome.

    Side note: A huge chunk of one my TC interviews included a lengthy discussion with the partners on a similar issue, so this is possibly something worth having an opinion on!
     
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    Daniel Boden

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  • Sep 6, 2018
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    One section of the article mentions the view that "after the last financial crisis [reforms] did not address some of the underlying causes, such as outsized bonuses that encourage excessive risk-taking by bank executives." I have to say that I'm inclined to agree. When I studied banking law at university, I think what shocked me the most is that a lot of reforms introduced since the 2008 crisis lack any real bite. Most are voluntary and the only pressure to comply comes from shareholders.

    The almost $10bn in losses suffered by Credit Suisse on the Greensill fiasco alone allegedly resulted from executives and the chief risk officer overruling risk analysts on Grensill's risk rating mere months before its collapse. And while high profile dismissals and executive board changes make it seem like CS are taking the situation seriously, the bank is reportedly considering letting clients foot the bill for their losses rather than compensating them. CS position is that the funds were only offered to investors who were well aware of the risks. Any litigation investors bring is probably going to argue the contrary, that they did not know the risks and possibly that the bank failed in their duty of care to provide them with accurate advice.

    Without getting into it too much and likely boring everyone, case law demonstrates that the liability rule tends to favour banks. There generally is a heavy burden on clients to prove breach of any statutory, common law or fiduciary duties. Needless to say this is going to be one long ride for angry investors, and not one that seems likely to lead to a positive outcome.

    Side note: A huge chunk of one my TC interviews included a lengthy discussion with the partners on a similar issue, so this is possibly something worth having an opinion on!
    I thought that legislation such as Basel II and Basel III did address some of the issues fairly significantly? E.g. with the minimum amount of capital that banks now have to hold?

    Equally, hasn't there been a massive reduction in the size of bonuses that are available to bankers? I thought these bonuses were capped at 100% of the banker's salary which is obviously significantly less than what was the case pre-2008?

    Obviously though, however far these regulations have gone, it's clear that, as the article says, that the attitude to risk is what needs to change more than anything. Banks behaving like hedge funds and making cavalier, outsized bets with significant leverage is a very slippery slope as demonstrated by CS' failure to get out of the deal when they saw it going downhill, unlike banks such as GS which managed to avoid any real significant losses by acting quickly
     
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    Dheepa

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  • Jan 20, 2019
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    I thought that legislation such as Basel II and Basel III did address some of the issues fairly significantly? E.g. with the minimum amount of capital that banks now have to hold?

    Equally, hasn't there been a massive reduction in the size of bonuses that are available to bankers? I thought these bonuses were capped at 100% of the banker's salary which is obviously significantly less than what was the case pre-2008?

    Obviously though, however far these regulations have gone, it's clear that, as the article says, that the attitude to risk is what needs to change more than anything. Banks behaving like hedge funds and making cavalier, outsized bets with significant leverage is a very slippery slope as demonstrated by CS' failure to get out of the deal when they saw it going downhill, unlike banks such as GS which managed to avoid any real significant losses by acting quickly
    While I think the Basel regulations are great I don’t think it necessarily address the problem that: Executives tend to get away with quite a bit (often one or two high profile investigations/charges in what could not have possibly been a one man operation anyway) there tends to be a lack of transparency on what is sold to clients and that even if significantly less than what was available pre-2008 the bonuses still act as enough incentive to take on more than risky deals.

    Re: GS getting out quickly - think GS have already lost quite a bit from the 1MDB banking scandal (both reputationally and from paying out compensation) so I’m sure they’re taking compliance and risk a lot more seriously because of it.
     
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    Daniel Boden

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  • Sep 6, 2018
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    While I think the Basel regulations are great I don’t think it necessarily address the problem that: Executives tend to get away with quite a bit (often one or two high profile investigations/charges in what could not have possibly been a one man operation anyway) there tends to be a lack of transparency on what is sold to clients and that even if significantly less than what was available pre-2008 the bonuses still act as enough incentive to take on more than risky deals.

    Re: GS getting out quickly - think GS have already lost quite a bit from the 1MDB banking scandal (both reputationally and from paying out compensation) so I’m sure they’re taking compliance and risk a lot more seriously because of it.
    Yeah I'd agree with that and re GS I'd agree and would imagine they're feeling pretty pleased with themselves that they've avoided a similar scandal this time around