A firm without leaders
Debit Suisse remembrance series - part 5
“FINMA noted that the bank made a cumulative net loss of more than $2 billion in the ten years before it collapsed, yet paid out bonuses of about $35 billion in the same period. With such rewards available for failure, who needs success".” Duncan Mavin in the new book Meltdown: Scandal, Sleaze and the Collapse of Credit Suisse
This is Part 5 of the Debit Suisse remembrance series.
In Part 1 I looked at the series of awful investor communications 4 Investor Days and a Funeral
In Part 2 I looked at the legendary investors that came out of the firm Alpha Dogs
In Part 3 I looked at how the firm outperformed its peer group during the Global Financial Crisis but struggled in its aftermath The bank that won the battle but lost the war
In Part 4 I looked at the scandals outside of the investment bank in wealth and asset management If you can't trust a Swiss banker, what's the world come to?
Mavin’s new book is easy to read and has a treasure trove of nuggets including items that even the avid Credit Suisse watcher like me didn’t know. A line that made me chuckle was that staff referred to IWM as “Iqbal Wants More”. The charming but super ambitious Iqbal Khan had been quickly promoted to managing the International Wealth Management (IWM) and then asset management businesses.
I thought I knew just about everything about how far out of their depth most of the Credit Suisse management team and Board were, but Mavin tells many stories that illustrate this point. One jaw-dropping one illustrates well how it was not just the incompetence of the long-time Chairman Urs Rohner but the whole Board. When Axel Lehmann became Chairman of Credit Suisse in early 2022, he ordered yet another strategic review with the help of external advisers such as the investment banking boutique Centerview. The advisers presented data on how Credit Suisse’s investment bank had a fraction of the revenue of the likes of Goldman Sachs but had a similar headcount and costs. In summary, Credit Suisse’s investment bank materially lagged all other Wall Street players in productivity and returns. The Board was shocked and blamed their lack of knowledge on the poor information they were provided with previously and the noise caused by a state of constant restructuring under successive management teams.
But here’s the thing. The insights the Board was coming away with were well-known. I could have told them this at any point in the prior decade. Any sell-side banking analyst could have told them this. Any financial journalist could have told them this. Any buy-side portfolio manager who had invested in banks could have told them this. Even a student with an Internet connection could have done this!
Over the prior decade, the Credit Suisse Board and management had spent a fortune on McKinsey and other consulting firms. They surely would have educated the Credit Suisse Board. What governance was the Board providing in the decade before Credit Suisse’s collapse?
This brings me to Urs Rohner, who joined Credit Suisse as its top lawyer in 2004. Rohner joined the Board of Credit Suisse and served as Vice Chairman from 2009, pretty much the peak point in Credit Suisse’s competitive position. He then served as Chairman from 2011 to 2021. The Ethos Foundation estimates that Rohner made CHF52m in salary most of it in cash in in his 12 years on the Credit Suisse Board. Rohner is the ultimate insider of Zurich. The photo below from the Credit Suisse social media feed in 2014 shows him with his partner a former model and head of the Zurich Film Festival as well as Matt Damon and George Osborne who was Finance Minister of the UK at the time.
Rohner was famous for creating a culture of fighting legal and compliance issues aggressively rather than getting on top of things or learning the lessons of past mistakes. This frustrated regulators and governments leading to bigger fines and tougher sanctions.
In Meltdown Mavin outlines how Rohner had competed with Brady Dougan for the CEO job and had an adversarial relationship with Dougan when he returned to the Board. There is also detail about how Tidjane Thiam was not sure if Credit Suisse was the right next step for him after Prudential or if his lack of investment banking experience was an issue. But Rohner chases Thiam relentlessly for the CEO role, is super confident that the lack of investment banking experience is not an issue, and hides the weak financial position and other cobwebs from Thiam. The latter ensured that the new Chairman-CEO relationship got off to a rocky start.
Thiam may have been the right person for the job of Credit Suisse CEO in a bull market when the firm had no legacy risk and compliance issues and a clean balance sheet, but he always seemed an odd choice when a wartime CEO was required who knew how to manage the risks of an investment bank. Surely Bill Winters who had been co-CEO of the huge JP Morgan investment bank during the Global Financial Crisis and was still available would have been a better choice?
But Mavin notes that although Rohner was as liable as anyone, the demise of Credit Suisse was a team effort. As they say, it takes a village to raise a child or a village to sink one of the world’s largest banks!
Reading Mavin’s book you wonder if Dougan was a great risk manager or just got lucky during the Global Financial Crisis as sub-prime investment banking was not naturally a big area for Credit Suisse. By the time of his exit from the bank any outperformance during 2008 had been lost and Credit Suisse was a bank in crisis.
A common thread between Brady Dougan, Tidjane Thiam, and their successors was promoting people they perceived as loyal but with very little expertise particularly in the relevant field.
In 2007, I had just landed at London Heathrow after a marketing trip in the US, when I got a message that there was an urgent department meeting, and I needed to get to the office. My boss the head of European equity research David Mathers was becoming the CFO of the investment bank. A few years later he would be the group CFO of the whole bank. Few of us in the research department could understand it. He had limited control function experience, and the head of European equity research was more a bureaucratic role than one even a top analyst would want. We all guessed he had a friendship with Brady, but successive CEOs kept him on, and he became one of the longest-serving CFOs of a major global bank. This was a reign during which the franchise imploded, the controls and accounting went from bad to terrible, and the share price tanked. Mavin’s book highlights how Credit Suisse shareholders grew frustrated with all the adjustments and moving around of numbers by Mathers. But Rohner and the Board did nothing for a decade.
This tendency to promote those without relevant experience or enough pedigree was a feature rather than a bug of the last decade of Credit Suisse.
Lara Warner rose quickly from head of US equity research to group head of compliance and then Group Chief Risk Officer. Credit Suisse was a bank with a legacy of risk and compliance failures, and it promoted someone with zero experience in these crucial areas. She would go on to overrule colleagues who had concerns about Greensill and the hedge fund Archegos.
Brian Chin rose from running securitized products to the whole investment bank quickly and was replaced when the bank lost $5.5 billion on Archegos. Contrast this with how star trading desk heads have risen at competitors more slowly and with greater pedigree. When I was at ICAP in the early years two of our most respected clients were Troy Rohrbaugh and Andy Morton. Rohrbaugh took JP Morgan from a Tier 2 player in FX trading to a market leader across the whole business. His role expanded to run all macro trading and then credit trading and eventually equities were added to his remit. Now he is co-head of the investment bank. Andy Morton was known in the rates world from Lehman and then rebuilt Citi into being a top 3 G10 Rates trading franchise. He then became head of macro, head of all fixed income, and head of markets.
Another one of Thiam’s initial inner circle was heir apparent Iqbal Khan, an auditor who was promoted to head of International Wealth Management and then Asset Management. Khan did very well albeit by aggressively expanding lending to super-rich people in emerging markets a strategy that was unlikely to be sustainable. But it is hard to imagine another bank or any major firm where someone in Khan’s position would buy a house next to his boss without asking him first and then get into next-door neighbour fights with him. The only effective hedge by a Credit Suisse CEO was not a financial one but more the garden variety type that Thiam put up to prevent Khan from being able to look into Thiam’s house!
In Meltdown Mavin outlines how when Credit Suisse went for very typical Swiss leaders they were just as out of their depth. Another one of Thiam’s promotions was Thomas Gottstein who was an investment banker with a small amount of wealth management experience. But Gottstein had limited experience in building major businesses when Urs Rohner made him group CEO of a bank with a problematic balance sheet and cost structure. The final pairing of Axel Lehmann as Chairman and Ueli Korner as CEO instead of a shock and awe strategy avoided the media at key moments when confidence was low, and rumours were spreading through tweets of a bank in distress.
The Credit Suisse Board and management team fiddled while Rome was burning as did the Swiss authorities. Credit Suisse shareholders are the ones that took the immediate pain and in the long run, it will be the Swiss people. Switzerland now has only one global bank (UBS) for its multinationals and this bank has a balance sheet twice the size of the Swiss economy.