Conviction casts a pall over Credit Suisse

How much longer will they remain at the helm of CS? Keystone

Credit Suisse’s decision to pay a $2.6 billion (CHF2.3 billion) fine and plead guilty to helping US citizens evade tax removes the heaviest of the legal clouds hanging over the Swiss bank. However, it raises other questions.

In the short term, the main question is whether Credit Suisse’s guilty plea will deter other financial institutions from doing business with it – pension funds, in particular, sometimes have provisions preventing them from working with convicted entities.

In recent weeks, Credit Suisse has spent a lot of effort going through the possible ramifications of a guilty plea with clients, and Brady Dougan, chief executive, said yesterday that he was confident there were no legal issues to prevent counterparties from dealing with the Swiss bank.

However, Kinner Lakhani, analyst at Citi, said client behaviour remained hard to predict. “While we expect that this event has been well flagged and the impact likely to be muted, there is always the small risk of unintended consequences,” he said.

The second immediate question is the future of Credit Suisse’s senior management. Mr Dougan and Urs Rohner, chairman, both reiterated their determination to stay in their jobs yesterday morning. However, they have faced calls from politicians to stand down, and the public mood is also in favour of change. A poll on the website of Tages-Anzeiger, the Swiss daily, found that about 78% of respondents felt Mr Dougan and Mr Rohner should both resign.

A third short-term question concerns Credit Suisse’s capital position. Taking into account the provisions the bank had already made to deal with its US problems, the fine will force the bank to take a  CHF1.6 billion ($1.8billion) charge. The bank previously paid $196 million in February to US regulators on the matter.

Surplus assets

If the charge had been applied in the first quarter, the bank said, its core tier one capital ratio would have been 9.3% – shy of the 9.5% that prompted Deutsche Bankto raise capital, and well short of the 13.2% achieved by its main Swiss rival UBS.

Credit Suisse said it would seek to restore its capital ratio through sales of surplus assets, including real estate, and by cutting risk-weighted assets. But analysts said the bank would lag behind its peers in the short term.

“Credit Suisse are quite cash generative, so I don’t think it will have a lasting impact,” said Shailesh Raikundlia, an analyst at Espirito Santo. “But the fine will put Credit Suisse at the bottom of the pack of investment banks in the short term, and their shares could suffer a discount as a result.”

A rival banker said Credit Suisse could face pressure to raise fresh equity, adding: “It goes back to whether you are forced to do this by regulators or whether the market forces you to do it. I expect the market will force them to do something.”

Debt trading

The other question for Credit Suisse concerns the bank’s strategy, particularly in its investment banking division.

The financial crisis and the wave of regulation that followed have made several formerly lucrative parts of investment banking, particularly in debt-trading, increasingly uneconomic.

A person familiar with the Swiss bank’s strategy said the new Basel III accounting rules for banks had trebled the capital required for much of its fixed income business, adding: “There have been large changes and there is more to come.”

Analysts said Credit Suisse’s “macro” business – which includes its rates, commodities and foreign exchange activities – was in need of attention, as it is beset by falling returns and low market share.

“Barclays’ move has given the banks above it in the global league tables some room. But it has increased the pressure on all those below them, in particular Credit Suisse,” says Mr Lakhani.

Rainer Skierka at Bank Vontobel in Zurich takes a similar view. “The problem for Credit Suisse is that it is one of the in-betweeners,” he says. “It is too big for the local market, but not big enough to be a global player.”

Copyright The Financial Times Limited 2014

Holder rewrites legacy

Eric Holder, the US attorney-general, has rewritten part of his legacy in a few months.

With the announcement of Credit Suisse’s guilty plea to conspiring to help Americans evade taxes, he is credited as the first prosecutor in 20 years to push a global bank to admit criminal wrongdoing.

Until Monday, the 63-year-old prosecutor stood to have a legacy defined as someone who was soft on Wall Street during a Democratic administration.

He told Congress in March 2013 that some financial institutions were “too large” to charge and has been criticised for mishandling the law enforcement response to the financial crisis, in which no senior Wall Street executive has gone to jail. The Credit Suisse case demonstrates he has a tougher side.

In the five years since he was sworn in as Barack Obama’s choice – and the country’s first African-American attorney-general – Mr Holder’s Department of Justice has been defined by controversy, defiance, and a willingness to make changes.

He was no stranger to the politics of Washington or the DoJ, having grown up in its ranks. A native of the Bronx in New York, he joined the department after law school. He was named US attorney for the District of Columbia and under the Clinton administration was the DoJ’s second-in-command.

He returned to the department after working at a law firm. As attorney-general he has spent time focusing on equal voting rights, hoping that would be his legacy. But his tenure has also been marked by controversy. He failed in his effort to bring suspected terrorists to trial in US courts.

The House of Representatives held in him “contempt” recently for refusing to hand over papers on the department’s botched “Fast and Furious” gun-running sting.

Kara Scannell, Financial Times