Credit Suisse, once the darling among banks, has suffered a stunning downfall. The Swiss behemoth, which had financed the Alpine railroads, bankrolled Silicon Valley’s development and tended to royalty, has fallen off a cliff and sunk without a trace.

This end is not the outcome of an overnight error of judgment like rogue trader Nick Leeson single-handedly destroying Barings Bank in the early 1990s. Instead, it is a cocktail of scandalous money management, treading on the edges of the law, and mistrust at the top, dating back years. Banking is about ethics, fair play, and trust. Credit Suisse was anything but that.

The bank pursued aggressive growth via acquisitions that led to a complex structure. In 1990, it bought America’s First Boston, a bank that lent billions to fund risky buyout transactions. Thus began the marquee Swiss bank’s dangerous operations, including involvement in leveraged finance and mortgage-bond trading.

Worse still, it dated in murky scandals. Let’s do a long hop to 2015.

Breaking point

In 2015, a private banker with Credit Suisse started to draw money from wealthy client accounts and use it to recover the losses of other clients. In this age-old practice of teeming and lading, the bank looked the other way as long as cash kept flowing. Along the way came charges of corruption and money laundering. Suisse faced criminal conviction for allowing drug dealers to launder money in Bulgaria and was entangled in a corruption case in Mozambique. The last straw was when a Bermuda court ordered it to cough up $500 million in damages to a former Georgian Prime Minister for fraud against him.

To compound the problem, an unsightly conflict among the top brass of Suisse erupted in 2019, leading to a lack of trust in the upper echelons of authority. In the subsequent year, the bank resorted to hiring private investigators to conduct surveillance on its ex-head of wealth management!

In 2021, the bank felt the heat with the collapse of the US family hedge fund, Archegos Capital, and the British supply chain finance firm, Greensill Capital. No one was willing to touch Archegos with a barge pole, yet Suisse was in dalliance with it. Archegos had used total return swaps to build up stock positions in stocks without public disclosure.

Total return swaps are financial contracts in which one party (Payer) agrees to pay the other party the total return — interest, dividend, capital gains — of a specific asset. In exchange, the party receiving the payments (receiver) pays the payer a fixed or floating rate. These swaps are used to gain exposure to assets without actually owning them.

The total loss from the Archegos tale of woes is estimated at $10 billion, and Credit Suisse bit a large chunk of the bullet.

Domino effect

The last straw that broke the camel’s back was the delay in the publication of the annual report 2022 following a query from the US Security Exchange Commission. This query is a red flag for accounting, and the writing got visible on the wall when banks connected to Suisse began buying CDS to protect themselves.

Credit Default Swaps (CDS) protect the buyer against the risk of default by a borrower. In a CDS agreement, the buyer pays a periodic premium to the seller, who in turn agrees to pay the buyer a fixed sum of money if the borrower defaults. When a lender takes a CDS on a borrower, the creditworthiness of the borrower nosedives and the cost of borrowing shoots up.

Around this time Silicon Valley Bank fell and Credit Suisse came under the scanner. There was every possibility that Suisse would default, and if that happened, a liquidity crisis in the global inter-banking circle was imminent.

The central bank stepped in with a financing of $54 billion, but that didn’t wash. With the Swiss banking sector at risk, Swiss authorities pushed UBS to become the reluctant white knight. Under the deal, UBS will buy Credit Suisse for 3 billion Swiss francs ($3.23 billion), which is 60 per cent less than the prevailing market capitalisation of Credit Suisse. UBS has also agreed to assume 5 billion francs ($5.4 billion) in losses, and $17.3 billion in Credit Suisse bonds will be wiped out.

The fallout has a broader impact. Banks will shy away from risky risk profiles, may lend less, and economies could struggle to grow. It would make it harder for central banks to raise rates to contain inflation.

There is a chilling parallel to what happened in India in 2021. That year the homegrown Lakshmi Vilas Bank faced closure with a two-year hunt for a suitor. A moratorium on the withdrawals helped to forestall a run on the bank. The government spoke to DBS to buy and value the entity at zilch, with shareholders and bondholders getting nothing.

Credit Suisse’s fall is a cautionary tale of what can happen when a bank loses sight of its responsibilities and takes on too much risk.

The writer is a CA and the co-author of the book The Great Bank Robbery