The demise of Credit Suisse
SYLVIE DOUGLIS, BYLINE: NPR.
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ADRIAN MA, HOST:
Here lies Credit Suisse, a Swiss bank that was with us for 166 years until it met its demise this past weekend in a forced sale to its rival, UBS. Credit Suisse will be remembered as a global financial giant, which financed everything from railroad companies to tech companies - a bank beloved by both the very rich and the super rich. But Credit Suisse was also a troubled - some might say troublesome - institution, plagued by scandals, bad investments and, most recently, a bank run.
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MA: This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma. Today on the show, we'll talk with journalist Alice Fulwood about how this financial giant grew so big and why it fell.
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MA: Alice Fulwood, Wall Street correspondent for The Economist and co-host of its "Money Talks" podcast, thanks for joining us.
ALICE FULWOOD: Thank you so much for having me, Adrian. It's a pleasure to be here.
MA: Is there an analogy or a metaphor in your mind that gives people, like, an idea of what Credit Suisse stands for in the world of banking?
FULWOOD: You know, I think, if you if you'd asked me that, like, 10, 15 years ago, I would have thought that it was, like, one of those secretive Swiss banks that looked after a lot of rich people's money - so it was sort of one of those elites of the banking world - and that it sort of, in particular, catered to sort of the wealthiest.
MA: Ah. So it's like they have, like, different tiers of credit cards - like, gold and platinum cards?
FULWOOD: Yeah. So it would have been like - I don't know - like the Chase Sapphire Reserve or, like, one of the, like, fanciest American Express credit cards, I guess. But over the past sort of more than a decade, it's sort of reputation has really taken a pretty terrible hit. It sort of became the problem child of global banking, really.
MA: OK. But before we get into some of those problems, I asked Alice to talk about how Credit Suisse made its money.
FULWOOD: It had its retail bank, which was where it sort of collected deposits from sort of regular Swiss people. It had its big sort of wealth management arm, which looked after the sort of assets of wealthy people all around the world, and it also had its investment bank. And, in general, sort of most of the really big, systemically important sort of global banks were formed in this way during the sort of heydays of investment banking and banking in general, sort of - that ran all the way up to the 2008 crisis.
MA: Now, Credit Suisse survived the crisis, but Alice says the years that followed were sort of the beginning of the end for the bank. And during this time, there were three main trends playing out. First, there was the fact that interest rates in Europe were really low for a long time, which made it hard for Credit Suisse to make money on the sort of bread-and-butter lending it used to. Second, its investment banking arm made some spectacularly bad bets - investments that blew up in its face and lost the company billions. Third, and maybe most notoriously, the company was plagued by scandal.
FULWOOD: Yeah, so it's funny, there have been so many scandals that it's...
FULWOOD: ...Hard to know which are the sort of biggest and most important to mention.
MA: Well, how about the time that Credit Suisse hired private detectives to spy on a former employee or the time that some of its wealthy clients were revealed to have connections to human trafficking and corruption and money laundering? Or how about the multiple times it got busted for helping its clients avoid taxes? Now, despite all this, Credit Suisse survived - that is, until this past week.
So what happened?
FULWOOD: It seems like the sort of various scandals and reorgs (ph) and problems that Credit Suisse was having essentially eventually led to the sort of total loss of confidence of its shareholders - seems to have been the sort of potentially fatal blow. So on March 5, Harris Associates, which was sort of one of Credit Suisse's biggest shareholders - sort of stuck by it through all the scandals and restructurings - they announced that they had thrown in the towel. Then, obviously, sort of a few days later, you had the run on Silicon Valley Bank and the failure of that bank in the U.S. And a few days after that, the Saudi Arabian Investment Fund, which is Credit Suisse's largest shareholder, said, we're not giving you any more capital. We're done.
MA: They're large shareholders. They looked at the company, and they were like, you're cut off.
FULWOOD: They sort of finally threw in the towel and said that they had to try and sort of make it on their own, I guess. And, you know, it transpires that they probably couldn't. So now they've had to be sort of forcibly merged with UBS, Switzerland's other large bank.
MA: Can you tell us about that? So, like, that happened over the weekend. What happened there?
FULWOOD: Yeah. So it's a sort of fascinating deal that was put together. And sort of full disclosure for your listeners - I did actually work for UBS for a few years after I graduated.
Yeah, so UBS and Credit Suisse were, like, the sort of big rivals of Swiss banking. They were the sort of two massive Swiss institutions. They had - you know, both had huge wealth management businesses, huge retail deposits. And, essentially, it's been described as sort of a shotgun wedding.
FULWOOD: It's been sort of long rumored that they might merge, and both banks have sort of vehemently resisted the idea that they should be sort of fused together. But, essentially, what you saw from the Swiss National Bank over the weekend was them sort of thinking that this was the best possible solution to restore confidence in the sort of Swiss banking industry. And so in order to arrange that deal, UBS is going to pay Credit Suisse's shareholders sort of a fraction of where the bank was trading on Friday, but about sort of $3 billion worth. The Swiss National Bank has sort of agreed to help UBS bear any of the losses that it makes if it has to sell off some of Credit Suisse's businesses. So it's agreed to sort of put up a maximum of 9 billion Swiss francs, which is sort of just shy of $10 billion to do that, and it's also going to sort of provide 100 billion Swiss francs of liquidity. And yeah, eventually, sort of after years of rumors and rivalry, the two banks will merge.
MA: So that is - I mean, it's so interesting, knowing now that context of them being rivals. It's, like, almost like hearing that Coke bought Pepsi - or maybe that Coke was forced to buy Pepsi.
FULWOOD: If Coke bought some sort of very poorly run little brother of it. I don't know whether that's Pepsi, but some other sort of soft drink company that's really having a rough go of it.
MA: Now, it's worth noting here that a forced sale was not the only option here. For one thing, Credit Suisse held about $17 billion worth of these things called contingent convertible bonds, aka CoCo bonds. So these types of bonds came into being after the Great Recession, and they offered a really high interest rate to bond investors, which was because they were riskier. And the idea here was that these bonds were essentially an emergency life vest for the bank. When a bank is crunched for capital, they can redeem the bonds to get out of that crunch.
FULWOOD: These are often called bail-in bonds in the lingo because...
MA: Huh - as opposed to bail out bonds?
FULWOOD: Correct - because instead of policymakers having to step in and bail out an institution, they are supposed to be able to essentially bail themselves out or bail themselves in by wiping out these bondholders. And so the first line of defense when a bank appears to be bust is that it sort of wipes out these CoCo bondholders and gets to sort of keep the money itself.
MA: So why didn't it? Well, Alice says the worry for the government's part was that if Credit Suisse deployed this emergency life vest and it did not stop the sinking, that could spark more panic in the banking sector. So policymakers, out of caution, pushed UBS to instead buy up Credit Suisse.
Now, another thing that is unusual about what went down is that you have a company, Credit Suisse, essentially going under. And normally, when a firm goes bust, company shareholders are the first to get burned. But in this case, the shareholders will at least get partially compensated, while a bunch of Credit Suisse CoCo bondholders are getting nothing.
So, like, zooming out from this particular moment, what do you actually think we'll think about this Credit Suisse situation months from now, years from now? Will we even think about it?
FULWOOD: Yeah, I mean, we'll definitely think about it. The sort of really big bank mergers of the past have been either the sort of making of or the undoing of a lot of institutions. So I'm sort of fascinated to see how the deal plays out. It's going to be hugely memorable either way.
MA: Alice Fulwood, Wall Street correspondent for The Economist, thanks for coming on the show.
FULWOOD: Thank you for having me.
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MA: This episode was produced by Viet Le and Noah Glick, with engineering from Katherine Silva. Dylan Sloan and Noah Glick checked the facts. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.
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