Credit Suisse’s Sale Of Securitized Products Will Not Correct Deeper, ‘Cultural’ Problems Reminiscent Of 2008 Meltdown: Experts

Authored by Michael Washburn via The Epoch Times (emphasis ours),

A building of the Credit Suisse Bank in Zurich, Switzerland, on Feb. 21, 2022. (Ennio Leanza/Keystone via AP)

The announcement on Tuesday that troubled bank Credit Suisse plans to sell off a bulk of its securitized assets to Apollo Global Management next year is expected to usher in a new phase of the bank’s reorganization and help shift its focus from high-risk to more traditional areas. But in the absence of changes to its internal culture, Credit Suisse may yet go down the path of failed financial institutions and trigger massive regulatory intervention not unlike what happened in 2008 with the fall of Lehman Brothers, banking experts and analysts have told The Epoch Times.

Recent and ongoing legal and financial problems at Credit Suisse, and the reputational problems that have driven consumers away, reportedly prompted the decision to sell off the assets, slashing its portfolio of securitized products from roughly $75 billion to $20 billion in value.

Credit Suisse’s stock price has plummeted 53.48 percent over the course of the year amid widespread concern over large-scale blow-ups, such as the insolvency of Archegos Capital Management, which Credit Suisse had given $30 billion to invest in ViacomCBS, whose own stock value subsequently tumbled, and a scandal over accounts implicated in tax evasion. On Oct. 24, the bank agreed to pay the government of France $234 million as compensation for revenues that France allegedly lost because of a pattern of fraud and money laundering from 2005 to 2012.

The bank has reported drastically diminished earnings for the third quarter of 2022, with total net revenues of $1.14 billion, a 58 percent decline from the year-ago quarter.

Dodging the Problem

During an earnings call, Credit Suisse CEO Ulrich Körner told investors and reporters, “Overall, our results for the third quarter of 2022 were significantly impacted by the continued challenging market and macroeconomic conditions.”

Though he briefly mentioned “a proactive approach to reducing our litigation docket,” Körner’s statement blamed adverse external forces for the bank’s woes and did not acknowledge the degree to which investors, consumers, and other players in the banking sector may have recoiled from a bank that seems to have learned so little from what experts call the lessons of Lehman Brothers and the global financial meltdown of 2008–09.

But the ongoing woes have badly shaken the market’s confidence in the bank and opened the door to disquieting possibilities reminiscent of those of 2008, experts have told The Epoch Times. Selling off securitized products is a cosmetic and partial solution that will not curb the excesses of an internal culture maximizing profits at the expense of fiscal probity.

With all these big financial institutions that are spread all over the world, they’re going to have a few leaks in the boat from time to time, because it’s hard to monitor everything from headquarters. But when you see it consistently popping up, as you do with Credit Suisse, when something keeps happening over and over again, I just think that’s an internal issue, a weakness in the corporate culture,” Jeffrey Hooke, a former vice president of investment banking at Lehman Brothers who now teaches at the John Hopkins Carey School of Business, told The Epoch Times.

“It’s taxes, and then there’s a hidden account somewhere that money managers are using for money laundering, and then you have this huge blow-up in the investment department,” Hooke said, alluding to investment strategies that have led to Credit Suisse losing billions with the insolvencies of such firms as Archegos Capital Management and British lender Greensill.

In Hooke’s view, the recurrence of such legal and financial woes typically reflects an internal culture that does not emphasize probity and putting the interests of clients before that of the bank’s own traders and executives.

“When you work at a company, there’s a culture attached to it. I’ve worked at a couple of large investment banks, I worked at Lehman Brothers and at Schroder Wertheim, and have usually seen that if employees think they can get away with something without much penalty to themselves, then they’re going to get away with it,” he said.

This observation applies to large players in the banking realm generally, Hooke said, referring to other recent blow-ups such as Goldman Sachs’s role in a scandal wherein the financial institution was found guilty of bribing officials in Malaysia and Abu Dhabi to the tune of more than $1 billion in return for business opportunities, including the underwriting of $6.5 billion worth of bonds for a Malaysian developer.

“It’s not just relevant to Credit Suisse, it’s kind of relevant to all these big institutions. Citibank and Morgan Stanley have had repeated run-ins with the authorities where they pay big fines. It just seems that with Credit Suisse, it’s a little more persistent,” Hooke said.

The Limits of Civil Action

While the Securities and Exchange Commission (SEC) in the United States, and regulators in Switzerland where Credit Suisse is based, may move aggressively against some instances of fraud, it is unrealistic to expect them to stem all malfeasance without an internal culture dedicated to thwarting such behavior, Hooke believes. Even though the SEC can refer cases of extreme wrongdoing to the U.S. Department of Justice for a potential prosecution, the regulators may simply not have the capacity to nip all mischief in the bud, he contended.

“I just think that it’s very tough for the regulators to catch all perpetrators who are intent on fooling them. You’ve got to rely a little bit on the company’s culture itself to repress that bad acting,” said Hooke.

“You can fine these companies billions of dollars, but the employees say, ‘What do I care?’ Even if they get caught, they usually just get fired. I don’t think they usually go to jail,” he added.

This is partly the result of the failure to take appropriate actions in the face of patterns of reckless conduct that led to a fiasco with worldwide repercussions in 2008–09.

“I’m sure that people on Wall Street look at what happened in 2009, when there were huge instances of questionable behavior by the big investment banks. When the dust cleared and the bailouts had taken place, no one really went to jail. That has to be at the back of the mind of people who act improperly. The bank itself and the stockholders will get slammed, but these are big institutions,” Hooke continued.

For those concerned about the health of the U.S. economy and the global financial system, the failure to improve an internal culture where such malfeasance goes on chronically presents a couple of unappealing possibilities. A systemically important bank may end up going bankrupt as the unending scandals, prosecutions, and fines drive customers and investors away, or the government may have to step in and apply massive bailouts and other heavy-handed measures inimical to the smooth functioning of the free-market system.

“You can’t let Credit Suisse go bankrupt. That would amount to promoting a financial panic almost like we had in 2009. Back then, the U.S. government let Lehman Brothers go bankrupt, and this helped cause a big recession and terrible things for the average guy in the street. Letting Credit Suisse go under would penalize the creditors and stockholders. In theory, that’s a good thing and will correct bad practices—but in real life, that would cause a shock to the system,” Hooke said.

“You can let a small bank go under. But Credit Suisse is a huge player, and they must have a government backstop,” he continued.

Such an eventuality would be reminiscent of what happened during the darkest days of the global recession, Hooke cautioned.

“Just look at the example of 2009. The government had to prop up all the other banks and provide huge loans, subsidized loans, and unilateral guarantees,” he said.

The Failure of TARP

In agreement with Hooke about the myriad structural and operational differences between small banks and global ones is Elinda Kiss, a professor at the Robert H. Smith School of Business at the University of Maryland.

“Any large international bank operating in many countries, and having to deal with regulators in many countries, is going to have problems that smaller banks working in just one country are not,” Kiss told The Epoch Times.

The history of the 2008–09 meltdown illustrates that it is all the more urgent for such banks to maintain robust cultures of compliance and avoid irresponsible conduct that may make them end up in need of a bailout, Kiss believes.

The Troubled Asset Relief Program (TARP) originally came into being in 2009 to provide the Treasury Department with up to $700 billion to buy up toxic assets and remove them from insolvent banks’ balance sheets. But things did not play out according to plan, Kiss noted.

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