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This is a measure of how seriously the Swiss authorities view the position of Credit Suisse, according to reports over the weekend, managing the takeover of UBS.
This is not the first time that the banking giant is considering a merger. Finally, it was Credit Suisse that considered acquiring UBS when it was in serious trouble after the Global Financial Crisis of 2008. UBS survived, with the support of the Swiss government, shareholder cash, unlimited cost reductions and, finally, a return to its strength: wealth and asset management is not a chimera of a full-service global bank that sings everything. Investment banking is reduced. Doing this requires not only a business but a cultural reset, which causes many problems. It took?—?after a few false starts?—?a decade before the changes became effective.
It’s not just the banks that need to rethink. So is the Swiss financial and political establishment. For the best part of the century, the Swiss financial USP has been discretion, carefully protected by banking secrecy laws. Or, more precisely, Swiss banks are where you hide your money, some questions. This was done as a result of US outrage when it discovered how UBS and others helped US taxpayers evade taxes. So the new USP is expertise: putting money in Switzerland not to hide it but because Swiss bankers know how to manage it well.
Credit Suisse’s travails now blow a hole in it. How is it that, despite all the regulatory changes, all the inspections, all the lessons learned (of course?), all the training, all the rules, Credit Suisse has become such a mess that the acquisition by competitors is now even in contemplation? And if a big, important bank can get into trouble, what does that say about Swiss expertise and, indeed, the effectiveness of Swiss regulation?
One clue may be the reason for the announcement on March 9 about the postponement of the 2022 annual report after “last call from the US Securities and Exchange Commission” the day before. Why did the SEC comment on “technical evaluation of the previously disclosed revisions to the consolidated statement of cash flows” in 2019 and 2020 and?—?this is the kicker?—?“related control” in March 2023 on the phone last night? What or who caused this? One possibility is that someone raised this with the SEC because other escalation and remediation efforts failed. If true, it is deeply troubling because it shows that there are no effective routes to raise concerns or, worse, that concerns raised are ignored or not addressed effectively. In short, the problem may not only be inadequate financial processes (“material weakness in our internal control over financial reporting” and management failure to “design and maintain an effective risk assessment process“?—?duh!). Maybe the bank’s process?—?and culture?—to identify, improve and solve problems is also not enough. If so, what other problems are lurking? This will trouble Credit Suisse, the Swiss regulator, the central bank Switzerland?-?and UBS?-if they want to acquire all or part of their competitors.
What about UBS? Take your competitors, clients, managed funds and employees better. Yes?—?all this. But is the acquisition necessary? Clients and staff will make their own decisions, regardless of the Boards going. The risks for UBS are considerable: absorbing a well-run company is quite difficult; bite one with the difficulty of something else entirely. There are likely many other nasties lurking under the carpet. Reputational trouble will remain on the UBS name, no matter how often press releases refer to Credit Suisse’s past problems. Will the cost be too great? – not only financially but in terms of management, energy and better regulatory oversight. Will it be a distraction from UBS’s own plans and for the current senior management, mostly new and brought in to build on what UBS has achieved and not clean up another bank’s mess?
There are many red flags (Greensill, Archegos, Mozambican tuna bonds, GFG) that are all missing from Credit Suisse. Some parts can also identify problems with some of the bank’s clients are eager to do business with. Although these concerns are ignored or, more likely, rationalized away. (Why, for example, does anyone think that it is possible to fight Archegos, an entity founded by someone? – Bill Hwang? – fined a few years ago by the SEC for insider dealing? how to manage risks and conflicts of interest arising from the desire to do apparently profitable business adjusted to the risk of taking on clients whose adherence to the rules is more apparent than real. Changing that is not a temporary work like Ulrich Koerner, CEO of Credit Suisse (part of the senior management team of UBS 2009–2022) or the new General Counsel (former General Counsel of UBS 2008– 2022) will tell you.
It’s not a problem limited to Credit Suisse of course. Questions have been raised about the role of Goldman Sachs in the relationship for Silicon Valley Bank (not for the first time). Barclays has faced endless problems caused by the tension between its investment bank and its retail bank, the latest problem arising from the appointment of Jes Staley and the punishment shown by the Board when questions about the relationship with Epstein were raised. (If only the Board and regulators were more serious that Staley didn’t understand why whistleblowing was important when there were concerns about his decisions in 2017–2018.)
In recent decades, the creation of larger financial institutions has led to conflicts of interest between the interests of these institutions, their clients, between different categories of clients and between different business segments. Many rules seek to recreate what were previously legal barriers to managing these conflicts. This doesn’t work. Repeated scandals and harm to the ultimate customers of banks and taxpayers lead to more intrusive regulations and fences? – the 21st century equivalent of Glass-Steagall. Regulators have been playing Whack-A-Mole with financial institutions ever since. But conflicts of interest are at the heart of all financial scandals. As an official from the US Financial Crimes Enforcement Team said when the Vatican Bank did a deal with the US in 2013 “large amounts of money sometimes bring out the worst in people.“
Is it time to rethink whether such a large global institution, however well-capitalized or well-organized, is a good idea? If you have an institution with a built-in conflict of interest, you will always have problems, even if systemic risk is avoided. Maybe smaller and more focused entities are best, who understand that banking is a service industry, part of the economic pipeline, there to serve others, not help themselves. Maybe global banks?—?like other aspects of globalization?—Is it an idea that needs to be challenged and rethought?
Cycle free
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