Monday, March 22, 2021

How big is the Greensill problem at Credit Suisse?

The franchise of Swiss Banks has historically been access to large numbers of seriously high net worth individuals and stuffing them full of "product".

The "product" is both third party and internal, but the internal stuff is where the profits are, but also where the conflicts of interest are.

And it is where the scandals are too. 

But it is a model that Credit Suisse has embraced. Famously Credit Suisse embraced the "One Bank" model on the basis that the private banking clients benefit from expertise over the whole bank. And at its best that is true.

And Credit Suisse have truly embraced it. 

When CS won Risk Magazine's Private Bank of the Year award in Asia last year they highlighted it. To quote:

In bringing value to local markets, Credit Suisse has another advantage, too: its ‘One Bank’ approach, in which the investment banking desk and the wealth management desk collaborate to a far greater extent than many other organisations. 

“Our success is defined by the degree of our collaboration,” says Cavalli. “And if you are a client, you feel this because you have the entire orchestration of the capability of the bank coming around you. This helps us to be early in identifying a client’s needs – when they are just starting their journey as an entrepreneur, and need structures for monetising illiquid assets – to when they are more established, and start having cash and liquid assets to manage.”

Embracing the synergies between the various divisions is what Credit Suisse is all about.

Until now.

Until Greensill.

To quote a Bloomberg article that had me falling off my chair:

Credit Suisse CEO Thomas Gottstein signaled he’d consider further separating the asset-management unit from the rest of the bank after the Greensill Capital collapse, as he steps up efforts to limit the reputational damage from the supply-chain finance scandal.

Making asset management an independent entity is “potentially part of the plan,” Gottstein said in a Bloomberg Television interview, days after the bank replaced the head of the business and removed it from direct oversight of the wealth management unit. “Having a holding company around that could be something we are pursuing,” he said, adding that the Greensill affair for Credit Suisse is primarily an asset-management problem.

Get this: over Greensill, a seemingly irrelevant trade finance firm, Thomas Gottstein will dismantle the classic model of Swiss Private Banking at Credit Suisse.

Like really.

If this were a billion dollar issue it is obvious what Credit Suisse would do. It would sign the check and move on. And blame previous management.

For this to the rational course of action (or even an action that warrants considering) the Greensill problem must be big. Really big. Like huge.

So let's have a proper disclosure. And start provisioning - because at this point Credit Suisse are talking down the issue (telling us Greensill is but a scratch) but simultaneously deciding to destroy their own business model to excise the cancer.

Like wow.


PS. Credit Suisse One Bank strategy is real. There are two problems with One Bank done with the consistency of Credit Suisse and they both apply to Greensill.

a). Every division assumes that the appropriate due diligence on Greensill (or any other client) was done elsewhere, with the effect that proper diligence never happens and

b). Every division of the "One Bank" will be implicated.

Thomas Gottstein, "One Bank" means you own this problem. Now it is time to be straight with us and your clients.



CrocodileChuck said...

This sounds eerily similar to Commonwealth Bank & its Colonial subsidiary pre 2018 Royal Commission on Banks.

Anonymous said...

Yes agree. The historical strategic move from investment banking and trading to asset management, and now they are hiving off asset management. Doesn't bode well. Presumably something in asset management has to be distanced from the bank - financial, regulatory or reputational.

Anonymous said...

John - Thank you for highlighting all the risks at CS so clearly. Quick question - If I look at the valuation I see it trades on a 0.7x P/TB or 8x PE versus say a closer to home CBA on 19x PE or 2.0x P/TB, yet CS has significantly more capital than CBA to withstand losses. Also I note that when UBS lost their French tax case for ~$5bn, the stock hardly moved given the excess capital they sit on. Indeed, much like CS UBS is continuing their buy back too, despite this surprising litigation hit. So how much litigation risk is already embedded in these Swiss valuations, given it seems they drop a few billion per year on events like these yet it does not move the share price or CET1 ratios? Also, do you think this is the final catalyst for CS and UBS merging their AM divisions (or more), given both lack scale, have underperformed for years and the Swiss press have been speculating about this (AM) merger for months now. Thank you for your help.

Pete D said...

CSAM has always been a bit of a curious beast that seemed to rely on an entirely different business origination model than most asset managers - e.g. cross-selling/internal selling rather than competing institutionally. And across the piece, the Due Diligence that was done on their insourced content was hugely lacking - they have a reinsurance strategy that they market externally which is laughable and essentially run by a sales guy.

Unknown said...

Heads are rolling at DB after missing out on this scandal.

Anonymous said...

Ever considered that the CEO is using this as an excuse to execute his plan, or do you prefer to be the drama queen?

Anonymous said...

Spot on. Brilliant.

stecar said...

best analysis on the CS Greensill. Contrarian thinking at its best. Would be interesting to have an insider view. Frankly it did not surprise me. It is in their culture and crisis after crisis and scandal after scandal,the culture is the same.

Anonymous said...

They say it's better to be lucky than right - this week, you are in the enviable position of being both!

WellRed said...

+$7B hole thanks to Archegos.


Dan Davies said...

I'd only add to your PS that there's also:

c) it's a fundamentally squirelly way to do business. You can't, not really, combine the role of a trusted advisor with a cross-selling target. This is why so many firms went open-architecture in fund selection, and exactly the same conflicts and issues exist when it's an investment banking transaction that's being "introduced".

JoshK said...

The Swiss regulators are very involved. This could be a move to placate them as well.

Lyall Taylor said...

What is good/rational for the bank might not be the same as what is good/rational for management.

It might not be a large financial cost but it might be a huge embarrassment for management & management might fear their jobs are on the line unless they are quite visibly taking stern corrective action.

It might be agency conflicts more than it is a large undisclosed financial hole.

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