Credit Suisse was a global Swiss bank with offices in all major financial hubs. It survived the 2008 crisis better than many competitors, according to The Wall Street Journal at the time. Yet that very year it did not extend its sponsorship of Swiss-based Formula-1 team where its iconic white front wing left quite an impression on one of us.
Why we bought it
Fast forward more than a decade, to the start of our investment journey, and we added Credit Suisse on our portfolio livery during the summer of 2020. We valued the bank at 27 billion CHF and paid 11 CHF per share. The decision came after seeing Credit Suisse on the lists of the Swiss-based Obermatt analysis firm, an important source of ideas at the start of our endeavours. The research firm, run by Hermann J. Stern, seeks to simplify financial metrics into ranks by comparing companies with their peers. Hermann himself spoke highly of Credit Suisse as undervalued. Its price-to-tangible-book ratio was well below 1. This ratio is a valuation technique that compares stock price to what would be left in theory if a bank was liquidated. Hermann said he was buying as late as 2022 when we had already sold at 21 billion CHF valuation and 8 CHF per share.
Before entering the position, we knew that Credit Suisse was under legal battles concerning Nazi-era and Holocaust victim assets. It culminated with settlement in 1998. We knew it was at the centre of international investigations for tax evasion. It pleaded guilty in US in 2014 and agreed to pay 2.6 billion USD in fines. And as late as 2019 it was revealed that Credit Suisse had private detectives tracking their senior employees. CEO Tidjane Thiam, who denied knowing about spying activities, resigned in February 2020. Thomas Gottstein took over and we hoped for a restart in culture. It was a trap.
Leadership is not culture: Archegos and Greensill
We mistook a change of leadership for a change of culture. We ignored what Clayton Christensen described as Principle #4 when writing in the context of disruptive innovation. Organizations have capabilities that exist independently of people who work within them. While humans are flexible, organizations depend on processes and values which are very rigid. Furthermore, Thomas Gottstein was very much a product of Credit Suisse culture. Before taking over he was promoted several times inside having joined the bank in 1999! What happened next under his leadership were two breakdowns.
Credit Suisse helped Archegos Capital Management make stock-market bets far larger than its own capital could support. It was done through contracts called swaps: Archegos received the gains or owed the losses on shares that banks held. The firm itself put up only a fraction of their value as collateral. It built similar positions with several banks, concealing how large and concentrated its combined bets had become. When its stocks started falling in March 2021 and Archegos could not pay up collateral, banks then rushed to sell shares they held as hedges. Because several were selling the same stocks, their sales pushed prices down even further. Credit Suisse was slow to exit and absorbed a hit of around CHF 5 billion. Later in the summer of 2021, the law firm of “Paul, Weiss” concluded after probe that Credit Suisse had “a lackadaisical attitude toward risk”.
About the same time, Credit Suisse was connecting its investors to supply-chain financing business of Greensill Capital. Greensill was paying the suppliers early at discount and collecting full amount from the buyers later making some profit. The service itself creates value by helping suppliers get paid faster and giving buyers more time to settle their accounts. However, some of its financing was based on sales that companies hoped to make rather than invoices for goods already sold. It was hidden lending! Credit Suisse funds bought these products while relying on insurance against failed payments. When Tokio Marine did not renew the insurance, Greensill could not get more funds to meet its obligations. The Swiss Financial Market Supervisory Authority later found that Credit Suisse had insufficient knowledge and control over what its funds were buying. Yet it marketed them to clients as safe, cash-like alternatives.
What actually happened when we finally sold
Two key officers left the bank in what was described by the media as “drastic action.” It was Lara Warner, chief risk officer, and Brian Chin, chief of investment banking. We should have sold our shares back then! Instead, we held until February 2022 when Suisse Secrets leaked despite draconian local laws protecting banking secrecy. It was the largest ever leak from a major Swiss bank. Data related to over 30,000 clients showed autocrats, war criminals, human traffickers and drug dealers had accounts with Credit Suisse, a failure of the bank to apply due diligence. The data ran up to 2010. It was the last drop of patience, and we exited immediately, avoiding the worst.
Complete meltdown followed. In October 2022, digital bank run fuelled by rumours in social media started. Some 110 billion CHF left Credit Suisse that year and then 61 billion in the first months of 2023. Under the pressure of Swiss authorities rival UBS agreed to buy Credit Suisse for CHF 3 billion in emergency deal, backed by liquidity guarantees of the Swiss National Bank itself. There was no shareholder vote. Those who kept the stock went away with the price of 0.76 CHF.
| When | What happened |
|---|---|
| 1998 | Settlement over Nazi-era and Holocaust victim assets |
| 2014 | Guilty plea in the US over tax evasion; USD 2.6 billion in fines |
| 2019 | Private detectives found tracking senior employees |
| Feb 2020 | CEO Tidjane Thiam resigns; Thomas Gottstein takes over |
| Summer 2020 | We buy at CHF 11 per share, valuing the bank at CHF 27 billion |
| Mar 2021 | Archegos costs the bank around CHF 5 billion; Greensill funds are closed |
| Apr 2021 | Chief risk officer and head of investment banking leave |
| Jul 2021 | Paul, Weiss report on Archegos: a lackadaisical attitude toward risk |
| Feb 2022 | Suisse Secrets leaks. We sell at CHF 8 per share, valuing the bank at CHF 21 billion |
| Oct 2022 | Social-media-fuelled bank run begins; CHF 110 billion leaves in the fourth quarter |
| Mar 2023 | UBS buys Credit Suisse for CHF 3 billion, CHF 0.76 per share, with no shareholder vote |
Pattern of Scandals
We could not have known the timing of Credit Suisse meltdown, but direction was clear through a pattern of scandals. In our buy checklist we now have a rule to look for any red flags indicating corners have been cut in the past in the company. And it is a reason to sell if this happens.
Finally, we avoid all the banks. Their measures of quality are risk culture and confidence of people willing to put their money. Both are hard to measure to grasp exactly when lights are flashing imminent danger. Banks can do many things right, but once confidence is broken that will change very quickly.
Reviewed 2026. There will be no next review: Credit Suisse no longer exists as an independent company.