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Rise and Fall of Credit Suisse Simplified: From Scandal to the Swiss Government's Emergency Rescue


The Rise and Fall of Credit Suisse Simplified: From Scandal to the Swiss Government's Emergency Rescue Plan

Following the collapse of regional American bank, Silicon Valley Bank, news emerged of the troubles at Credit Suisse, the second largest bank in Switzerland. Credit Suisse was established 167 years ago and had assets of over $550 billion, but despite its size it was on the verge of collapse. To avert a crisis, UBS was enlisted to take over Credit Suisse, a move deemed necessary by the government and financial authorities given the gravity of the situation. The potential bankruptcy of Credit Suisse would have had far-reaching consequences not only for the bank and its stakeholders, but also for the wider European and global financial market.


Acquisition by UBS comes after a series of scandals

Credit Suisse Timeline of Scandals
Credit Suisse Timeline of Scandals
  • After the 2008 Financial Crisis - Following the 2008 financial crisis, many banks made concerted efforts to reform and evolve their operations to better address the new economic landscape. However, it appears that Credit Suisse failed to fully embrace these changes and make the necessary adaptations.


  • Early 2019 - The scandal began when Iqbal Khan, the head of the bank's wealth management division, announced that he was leaving Credit Suisse to join rival bank UBS. This led to the CEO at the time, Tidjane Thiam, allegedly ordering surveillance on Khan. Khan discovered the surveillance, and Thiam was subsequently fired as CEO in spring 2020. The scandal attracted significant media attention and raised questions about the culture and governance of Credit Suisse under Thiam's leadership.


  • 2019 - Credit Suisse was also hit with a scandal related to illegal loans made to state-owned companies in Mozambique, known as the "tuna bonds" scandal. As a result, Credit Suisse and its former bankers were indicted by the US Justice Department on charges of fraud, conspiracy, and money laundering. Credit Suisse subsequently paid a $47 million settlement to US authorities to resolve the case.


  • 2020 - Thomas Gottstein became the CEO of Credit Suisse, following the resignation of Tidjane Thiam in the aftermath of the Khan scandal. Gottstein's tenure as CEO of Credit Suisse has been marked by a focus on risk management, cost-cutting, and sustainability as the bank seeks to rebuild its reputation and restore investor confidence.


  • Early 2021 - Credit Suisse involved itself in yet another scandal, this time involving Greensill Capital. The bank was one of the main investors in Greensill’s funds, which provided financing to companies that needed to pay their suppliers early. However, the funds were built on a shaky foundation, with much of the money lent to just a few companies. When one of these companies, UK-based Greensill client, GFG Alliance, ran into financial difficulties, the whole structure of the funds began to unravel. By the end of March the bank had been forced to liquidate resulting in $10 billion potential losses of which $1.2 billion was exposed to Greensill.

  • Credit Suisse was also implicated in the Archegos Capital Management scandal, which resulted in the bank suffering significant losses. The scandal involved a number of banks extending large amounts of credit to Archegos, a family office run by Bill Hwang, to invest in the stock market. When the investments turned sour, banks including Credit Suisse were left with large losses due to the collapse of the hedge fund. The bank suffered $5.5 billion in losses, the biggest trading loss in its history.


  • Early 2022 - After Credit Suisse experienced a series of scandals, there were demands to change the bank's strategy and culture. Antonio Horta-Osorio was brought in to lead this transformation and get the bank back on track. However, months after starting his tenure he allegedly breached COVID protocols and was also accused of using business assets, such as a plane, for personal use. He later resigned, admitting that the accusations were true.


  • June 2022 - Credit Suisse now faced another issue related to money laundering in connection with Bulgarian traffickers. The Bulgarian authorities accused the bank of money laundering and of failing to detect suspicious transactions. The bank was found guilty and was compelled to pay fines and compensation amounting to $2.1 million.


  • March 2023 - Credit Suisse faced a crisis due to a series of scandals, leadership changes, and multi-billion dollar losses. The investors' confidence in the bank was severely shaken, leading the Saudi National Bank (SNB), one of the top shareholders, to refuse further investment. This action by SNB caused panic among investors and resulted in a 24% decrease in Credit Suisse's stock price. The situation not only jeopardized Credit Suisse, but also posed a risk to the entire banking sector. In an effort to address the crisis, the Swiss Central Bank offered a $54 billion financing backstop. However, this action was not sufficient to restore investor confidence in the bank.

Swiss authorities try to prevent widespread contagion


It’s apparent that Credit Suisse had many problems. There were scandals, changes in management, and attempts at fixing things that didn't work out. This caused the bank to incur huge losses and damage to its reputation. Exacerbating the situation was Silicon Valley Bank’s collapse and the resulting loss of confidence in banks by investors.


In order to prevent the spread of banking contagion, the Swiss government took action by brokering a deal for UBS, Credit Suisse's main competitor, to acquire the bank for $3.2 billion. The Swiss government provided UBS with a guarantee to protect it from potential losses due to the acquisition by offering access to $100 billion in liquidity.


Credit Suisse is recognized as one of the "Globally Systemically Important Banks," implying that the bank's failure could result in severe economic instability.


Significance of Credit Suisse’s downfall outside of Switzerland


The significance of Credit Suisse's downfall extends beyond Switzerland, as the crisis occurred after the failure of three smaller US banks, indicating that poorly managed banks are struggling in the current high-interest rate environment. If more banks fail, they might stop lending money, which could hurt the global economy. All with the backdrop of central banks struggling to control inflation without causing recessions. The crisis has taught a valuable lesson that a bank's culture should never be taken lightly. The collapse of the second largest Swiss bank will remind the banking sector of the consequences of neglecting to learn from past mistakes and take appropriate measures to prevent future crises.


When a bank experiences problems caused by internal failures or rogue bankers, it can harm the livelihoods of many people. It is clear that there is still a lot more work to be done.

 




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