Rolling the Credits: Credit Suisse Suffers a Double Whammy​

By Beatrice Kang​

The Story

In recent weeks, the Swiss banking titan, Credit Suisse, has been rocked by two high profile bankruptcies which relate to their dealings with two firms, Archegos and Greensill. Greensill, an Anglo-Australian financial services firm, hit the headlines last month after announcing its insolvency as details over its role in financing the UK’s Liberty Steel and lobbying by former Prime Minister David Cameron resurfaced (Reuters; BBC). Credit Suisse’s asset management unit was forced to shut $10bn of supply chain finance funds that invested in bonds issued by Greensill.

Shortly after Greensill, Credit Suisse also suffered a $4.7bn loss last month after Archegos, a US hedge fund, folded (The Lawyer). The fallout caused by Archegos has led to the departure of Credit Suisse’s heads of investment banking and compliance and risk, driving the bank to launch two independent investigations into its investment banking and asset management operations (CNBC).

Following the back-to-back twin disasters and faced with impending lawsuits over the losses (Bloomberg), Credit Suisse announced last Thursday that it would raise $1.9bn from investors in a bid to rebuild its balance sheet (Financial Times). However, have the credits already started to roll for the Swiss lender? Top shareholders, such as Norges Bank Investment Management, Norway’s sovereign oil fund that owns 3% of Credit Suisse, has announced that it would vote against the reappointment of Andreas Gottschling, chairman of the bank’s risk committee (Financial Times; Wall Street Journal).

Credit Suisse has always prided itself for its risk and compliance management. The banking giant has often rested on its most prized laurel – in particular, on how it navigated the 2008 Financial Crisis without government intervention and reaped the rewards of its well-founded caution (City A.M). However, recent events tell us otherwise. In fact, the curtains may have already been drawn last year when Credit Suisse advised Softbank to create a $1bn lifeline of convertible bonds to the German fintech company Wirecard. This was shortlived – Wirecard collapsed and so did its ‘lifeline’.

What It Means For Businesses And Law Firms

Although Credit Suisse’s dramatic quarter may have come as a shock to some, critics remain unconvinced. Thomas Minder, a member of the Swiss Council of States stated that “it’s déjà vu” (New York Times). He argues that reforms after the last financial crisis did not address some of the underlying causes, such as outsized bonuses that encourage excessive risk-taking by bank executives. Instead, “the consequent lack of transparency may mean that banks are engaging in more risky behaviour than has been previously realised.” (The Lawyer).

Once the dust has settled on this issue, the will likely be two major kickbacks. Firstly, this crisis will likely cast a long shadow over Credit Suisse’s reputation. Shareholders have borne the brunt of the pain for the recent losses; with Credit Suisse shares losing almost one-quarter of their value since the beginning of March (New York Times).

The immediate opportunities for law firms in this area is increased litigation activity. For instance, groups of dissatisfied investors in Credit Suisse’s Greensill-backed supply-chain funds have enlisted law firms in Zurich and London to initiate claims against the Swiss bank to recover potential losses (Financial Times). Alongside Credit Suisse’s immediate reputational turmoil, long-term investor skepticism may impact the Swiss lender’s future reputation as a credible and reliable financier – reducing the opportunities in which law firms will deal with the bank in relation to big ticket M&A and capital market deals.

Secondly, from a long-term perspective, this crisis will intensify regulatory scrutiny which will require increased regulatory advice from law firms. For instance, due to the Greensill lobbying scandal, Boris Johnson has ordered an independent review, headed by ex-Slaughter and May partner Nigel Boardman, on the development and use of supply chain finance in government (Law.com). Moreover, the Swiss Financial Market Supervisory Authority (FINMA) has opened enforcement proceedings against Credit Suisse after both cases came to light – ordering short-term organisational and risk-reducing measures to reinforce steps already taken by the bank (FINMA's Website). Although the full, far-reaching regulatory impact of this fallout remains to be seen, it appears that letting sleeping dogs lie is not a good tactic when the credits are already rolling.

Image Credit: Pincasso / Shutterstock.com