September 22, 2024 | by Unboxify
The dramatic failure of Credit Suisse stands out as a pivotal event in global banking history. Less than a week after the collapse of three U.S. banks, the contagion of financial panic spread to Europe, culminating in the shocking downfall of this once-formidable financial institution. Amid a larger crisis of confidence in the banking sector, Credit Suisse’s fall wasn’t unforeseen to industry insiders. From unreliable financials to scandalous misconducts, Credit Suisse has now etched its name in the annals of banking history for all the wrong reasons.
Founded in 1856 by Swiss politician and businessman Alfred Escher, Credit Suisse initially served to fund Switzerland’s first railway system, averting dependence on the French banking system. It played a vital role in Swiss industrial development, financing key infrastructure projects including the construction of the first electric grid and aiding in the development of the Swiss currency.
In the aftermath of World War II, Credit Suisse was instrumental in restructuring Europe’s devastated economy, acquiring several other Swiss banks in the process. Throughout the 19th and early 20th centuries, it established itself as a prestigious, well-respected institution, expanding globally with a presence in the United States.
Despite its distinguished repute, early warning signs of misuse and ethical lapses were evident. An Italian branch, for instance, was implicated in facilitating tax evasion for its clients. Though minor hiccups initially, these instances foreshadowed deeper systemic issues and a culture of risk-taking at Credit Suisse.
As the bank expanded its operations globally through mergers and acquisitions during the 1980s and 90s, a sharp shift emerged within its corporate culture. Profit maximization and risk tolerance took precedence over ethical banking practices which ultimately led to substantial controversies.
By 2006, Credit Suisse had embroiled itself in hiding Iranian transactions from U.S. authorities, a precursor to more serious infractions. In 2014, U.S. authorities uncovered that the bank had been destroying bank records and concealing transactions involving undeclared accounts for decades. This resulted in a monumental $2.5 billion fine, marking it as the largest bank to plead guilty to a criminal charge in over two decades. Despite these infractions, the repercussions were mainly fines and forced resignations of key executives.
In 2016, Credit Suisse was implicated in an economic crisis in Mozambique. Along with the Russian Investment Bank VTB Capital, it provided $2 billion in covert loans meant for maritime projects, funds that were later misappropriated, including some transferred to the Mozambique military. The public revelation of the loans led to an economic crisis in the country, leaving its currency plummeting and inflation roaring. This fiasco had a devastating impact on Mozambique’s economy and lives of thousands, further marring Credit Suisse’s reputation.
In 2019, the bank hit yet another low with the infamous spying scandal, initiated by the CEO himself, Tajane Thiem. Surveillance operations were carried out on former head of Wealth Management Iqbal Khan, who had left to work for Credit Suisse’s rival, UBS.
The Swiss Financial Regulators discovered that Credit Suisse had planned and executed at least seven spying operations between 2016 and 2019, casting severe doubts about the ethical practices at the bank. Interestingly, days after an official trial commenced, the private investigator tracking Khan was found dead under suspicious circumstances.
This scandal led to the high-profile resignations of major executives, including the chairman, head of security, and eventually, the CEO. Despite these upheavals and new leadership attempts, another restructuring plan failed to stabilize the institution’s fragile credibility.
The pandemic and subsequent stock market chaos intensified the challenges for Credit Suisse. Companies that relied excessively on leverage, such as Greensill Capital and Archegos Capital, defaulted, leading to billions in losses for Credit Suisse.
Archegos Capital’s risky bets on selected stocks resulted in margin calls and fire sales, severely affecting banks, with Credit Suisse being the hardest hit. Concurrently, Greensill Capital’s collapse due to poor risk management compounded Credit Suisse’s woes. An independent report disclosed the failures within Credit Suisse’s investment bank and prime services divisions, focusing on short-term profits at the expense of sound risk management.
New leadership by Antonio Horta-Osório, a banker with an illustrious career, promised internal cultural changes and enhanced risk management. However, due to violating quarantine rules, he resigned within a year, declaring that the situation at Credit Suisse was the toughest he had seen in his 35-year career.
The tumultuous events of 2022 compounded the firm’s struggles. A significant leak revealed that Credit Suisse had been hiding funds for entities involved in human rights abuses, narcotics trafficking, and other severe crimes, totaling over $100 billion. Additionally, the bank faced significant fines and convictions over fraud and money laundering cases.
In a span of one year, Credit Suisse:
By the end of 2022, many financial advisors recommended that clients withdraw their deposits. Trust in Credit Suisse was evaporating. As 2023 approached, rumors of distress became validated when deposit outflows reached alarming levels.
On March 14, just days following Silicon Valley Bank’s demise, Credit Suisse delayed its annual report revealing material weaknesses in financial controls. Notably, clients began withdrawing deposits en masse, further exacerbated when the Saudi National Bank, one of its major shareholders, publicly stated it wouldn’t provide additional liquidity to the distressed bank.
The bank’s stock plummeted by 24%, compelling the Swiss National Bank to inject nearly $50 billion to stabilize the firm. However, the intervention failed as client withdrawals peaked at $10 billion per day, signaling the dire need for a drastic solution.
Facing potential catastrophe for the Swiss economy and its banking sector, the Swiss government initiated a hasty deal for UBS to acquire Credit Suisse. However, the move attracted significant controversy due to the hasty disregard for shareholder approval and parliament ratification.
Key Components of the Deal:
The government’s intervention and the manner in which it bypassed parliamentary approval have led to significant political discord within Switzerland. The Social Democratic Party has called for a special parliamentary inquiry, while discontent brews across the political spectrum.
While the immediate fear of systemic collapse was averted, integrating Credit Suisse’s dubious assets could tarnish UBS’s reputation. Pending investigations, particularly from the U.S. Department of Justice, regarding the bank’s role in circumventing sanctions for Russian oligarchs, have added to these concerns.
Potential Issues for UBS:
The collapse of Credit Suisse has further eroded global confidence in the banking sector, raising alarm bells among other potentially vulnerable European banks, particularly Deutsche Bank.
Analysts like Stuart Cole point out that Deutsche Bank, given its similar struggles and multiple restructuring attempts, could be next in line for such systemic scrutiny. Central banks and worldwide governments are closely monitoring these developments to devise appropriate interventions, balancing timely action against potential political backlash.
The dramatic rise and fall of Credit Suisse is a stark reminder of the pitfalls that accompany a relentless pursuit of profit over ethical banking practices. From industrial growth facilitator to a pariah embroiled in scandals, the institution’s story serves as a crucial learning moment for financial regulators, central banks, and governments globally. The implications of its downfall will reverberate across the financial systems and politics worldwide for years to come.
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