Fintech Horror Stories - Credit Suisse, Curtain Call (Part 2)

Today’s newsletter concludes the interview with a former employee who chose to go on the record about their experience at Credit Suisse (click here for part one). Let’s begin:

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I didn’t know much about Tidjane’s tenure, but it seems like there are some thinkpieces that are coming up claiming all the issues started when he was ousted, but I feel like people have short memories of when he was in charge…

I would say issues started under him and used to think “maybe it’ll get better now that he’s gone,” but they didn’t and they kept making the same mistakes, in the same vein as in the spying scandal. You had people continuing to say “let’s proceed as we always have.” The whole time I was there, you’d hear a lot of talk about “transforming the bank” that was going to happen. But it never happened and no one ever felt it; no one ever saw it take hold and everything was the status quo. Last I checked, it’s still being run the same way based on discussions with my former colleagues who are still there (with the exception of Prime Services that is gone).

Going in a slightly different direction, when you came aboard what would you say was one of the things you noticed that really surprised you?

Credit Suisse was my first job out of college - I interned with them, and the internship was a much different experience than when I became a full time employee.

Why so? Was that because you didn’t see as much or leadership changes, or…?

More limited, and we were working on a regulatory project - we were talking to people around the globe trying to get sign off on things. Really what it was, was risk manager not wanting to take time to sign off on datasets - so we were reaching out to get risk managers to sign off pretending it was a large project when in reality it was just a check the box exercise - of course, you don’t know that as an intern. When you look back on it, I was just doing what a risk manager of a risk manager would do, asking them to do something that should have been done a month ago, for example.

Once I got onto the company [as a full time employee], I was surprised by the lack of formal training. We had some training around how stocks work, how do options work, how do bonds work, how do swaps work, how do stocks work - there was a lot of that, and it was very interesting, but it didn’t really pertain to what I did day in and day out. There were no protocols or manuals - you have your predecessor or someone who knows what they did, and you get told what to do - there’s no consideration or effective challenge of why we did things a certain way, and if you asked you were told “well that’s the way we do it here.”

I will say, when I first joined the one thing that really shook me was when we would print out the morning’s break report - essentially what the front office said they traded vs what the back office had booked - and we were in the middle office and would print it out - I’ll never forget, one of my coworkers handed me two highlighters and a pencil and told me to highlight the items that broke negative yellow, and the ones that broke positive pink, and if they’re above 3 million then you investigate - on a piece of paper. Then you write down on the margins the adjustment you make, then go into the system - the old one we used every day - and you manually input those.

What I was proud of doing was that by the time I left, I built something where the data in the system fed into an excel sheet, the excel sheet analyzed all the information for you, you could quickly type the adjustments in Excel, and then you could upload that back into the system. I was proud of this contribution, but other teams continued to use highlighters and papers - something out of the 80s and 90s - and I just remember thinking this isn’t how a modern financial institution should be doing required regulatory work.

In your time, that was 2016/2017.

Yeah, it was right after Tidjane had joined, which was most of my tenure there. When I was an intern, there was Brady Dugan, who we used to joke was the first and last American CEO of a Swiss bank - but he had led Credit Suisse through 2008 - and there was a lot of nostalgia around how they had managed the recession - they didn’t need any bailouts and were well financed - it was a point of great pride for us. And Brady Dugan had a cult of personality around him - everyone loved him, a humble Chicago dude. He led us through a tricky time and did it really well. So we always had the idea that if there was another 2008., we would get through it. But we saw in 2022, 1-2 years after the whole Bill Hwang problem, the beginning of what would end up being the end.

Yeah, this is kind of more of the nail in the coffin - this isn’t something that came out of nowhere.

Right, this isn’t something that’s several standard deviations outside of our distributions here. I don’t even think we’re two standard deviations removed here - it’s not that crazy of an event, especially since Credit Suisse doesn’t even have exposure to any of the American banks. There was just a general flight to security - a UBS officer said it well, saying that they’ve seen inflows and there’s a general flight to security. In so many words, people were taking their money out of Credit Suisse, walking across the street and putting it in UBS. So there are many banks that are benefiting from this sort of crisis of conscience in smaller regional banks.

Yeah, even here in the States, no one’s taking cash out of banks and putting it under the mattress. People are going from one institution to another - now granted, it says something about profiles of institutions etc. But curious to get your take - what I feel accelerated this to some degree is investor sentiment. Obviously, there’s some depository component, but when you hear “the stock is down 20%, 50%”, that’s usually led to some kind of action whether in the US or overseas. What’s your take on that?

I completely agree. I think there’s a media component as well. They’re basically amplifying the investors complaining about their stock being significantly down and take it as an indication that somehow the bank will default and their equity and capital will be wiped out and then their assets will be impaired and that’s just not the case at all. You see in the case of SVB, they’re not negative on equity - the odds that the FDIC will have to pay anything out at the end of all this is low. The banks just ran out of liquid money - and that’s the point of a bank, they need to provide liquidity. You’re not seeing Lehman-style failures, you’re not seeing groups of banks falling because there is no money left.?

Very famously, there was Bearings Bank where Nick Leeson, the “rogue trader” as they call him, was able to “Break” the bank in 24 hours because he wiped out the equity of the entire bank - it was just gone - and that’s why that bank failed. And that is a very scary proposition - you have client money that is at risk. In all cases, you never had client money at risk - it’s not like Credit Suisse was taking a huge impairment to their bottom line or that they had booked billions of dollars of losses recently - it’s just that everyone pulled out their money and they couldn’t continue as a depository institution.

In terms of leadership, you talked about Tidjane and Brady, not sure if you have any takes on current leadership, but circling back to the start of our conversation around culture, particularly around staffing/etc. - how would you summarize the leadership culture overall? Do you see a point where things turned sour specifically?

I don’t know if I’m the most qualified person to answer this, as I didn’t serve under the two CEOs following Tidjane. From what I’ve heard on the inside, it hasn’t been great. I think it’s interesting - and this isn’t necessarily my opinion - but if you go to the website and look at their leadership team and look at their tenure, most of them came from UBS and a lot of them have 1-2, maybe 3 years at Credit Suisse. You can tell that after the purge of sorts due to the Bill Hwang scandal and corporate spy scandal, you have a young leadership team. Granted, they have experience at other institution - but they aren’t Credit Suisse. If you grow up in Credit Suisse and worked your way up, there’s something to be said about that, like knowing skeletons and what keeps you up at night - if you get in a leadership position you can then fix that. I think that’s important. What Credit Suisse made a mistake in was letting their best talent walk out the door - 1) because they couldn’t afford to keep them and 2) the employees were embarrassed to be associated with the name.?

Employees are like clients - as much as people think businesses extract stuff out of their employees, those employees have certain demands and requirements, and they don’t like working for bad organizations they’re embarrassed to say they work for because of scandal or otherwise. If you’re in the banking community and you hear “oh, that sad pitiful scandal ridden European bank, you work for them?” I think people would rather proudly say they work for JP Morgan, Goldman Sachs, UBS, etc. So a lot of good people walked out the door, and they weren’t capable of raising them up through their actual ranks and they had to outsource.

I also think it’s curious how many came from UBS.

You put your conspiracy hat on for a second and wonder if this was the game all along, with the idea to bring the future boss on board in some capacity so that when things go south, we have the right people to make the transition.

I don’t try to buy into the tinfoil hat theories to much, but it will be a fun observation to look at how many of the executives from Credit Suisse will stay on after this arrangement - and of those that stay, how many were former UBS people? My hypothesis will be that a large number of people who are retained at the highest levels (which normally in a situation like this are very few) will be majority former UBS people. They’re they only one with political capital and connections to stay on board. That might be the validation for any theories we have at this time maybe 1-2 years from now.

Any final thoughts or takeways you think folks may find interesting?

I think this will serve as a case study as to why we need updated systems in banking, and why so much of that revolves around risk management and how Credit Suisse accounted for risk was not the appropriate way to do it. Looking at this as just simple VAR models and stress cases and stress scenarios isn’t doing it - regulators missed this, Credit Suisse missed this, everyone missed this - and this isn’t even a stress event. So what would happen if 2008 came up again? I think the answer is we probably don’t really know. We pretend to and act like we do, but regulated institutions and how we look at actual risks faced there is broken.?

The solution is in technology, big data - organizing and structuring all of that in a way where you can drive meaningful answers to actual risks and doing that through up to date systems and technology, and comprehensive mathematics - not just “oh we’re two standard deviations on a normalized distribution” - no, let’s break that down and use actual high level analytics to provide real insights to regulators and have them look at it using appropriate tools.

I have a hopeful thought for you to consider - as you said, it’s not just Credit Suisse’s failure, it’s the regulators failure as well - do you think the regulators recognize that they failed here as well and that this is a shared failure, beyond just this event?

I don’t think so. Part of the aspect of being a bank regulator is that you have to be somewhat hypocritical. You have to look at a bank and say “they’re always going to act in an evil, non-prudent manner, they’ll act negligent, and take advantage of situations, and as a regulator we can do no harm.” They’re looked at as the good guys and no one considers the possibility that they might be abusing their power.?

A Wall Street Journal article recently came out talking about the failure of Credit Suisse convertible bonds - it was a portfolio manager who said that based on the current regulatory environment, he will not be investing in any of those types of bonds in the future. This essentially indicates that the Swiss regulators/authorities aren’t acting in line with actual property law - they’ve overstepped their bounds by saying these bonds are no longer good, just unilaterally. And then to tell the Credit Suisse shareholders, you don’t get to vote. That is sort of hypocritical as well, but I don’t think they look at themselves that way. Society wants to look at them as the good guys, because we want to have confidence in our systems, governance, and organizations - but they don’t see themselves as missing the mark, they say the banks missed the mark and should have known better.

Even the rating agencies, if you look back in 2008 they weren’t capturing the risk. And here, Credit Suisse essentially defaulted. Their bonds were investment grade. How many times are we going to have investment grade defaults occur for large banking organizations? I think the Lehman debt they issued the day before they went under was investment grade commercial paper. It’s like, how many times are we going to mess this up and then point the finger at the banks? Banks aren’t always acting in an evil or intrinsically bad place.

From my perspective, you have the lines of defense model, and I’ve been of the belief that this expands beyond the organization too - you have regulators, agencies, various other actors - whose job it is to mitigate risk even if that risk permeates outside the organization’s walls. It’s in everyone’s best interest the larger the organization is to tamp it down.

I think you’re right. Banks really don’t want to bring ruin upon themselves - but occasionally, it will happen.

I’ve enjoyed the conversation - airing the dirty laundry, but I also do care about a lot of people who work there. A lot of them don’t know what’s going to happen, and I hope they come through the other side. Some of them are “important people,” and some are just AVPs and analysts who are just going in day and day out giving their all and work their way up in an organization that’s really let them down.

I’ve enjoyed the conversation as well. Thanks for your time.